Squeezed consumers an unsustainable driver of UK GDP growth

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Questions have been raised about the sustainability of UK consumer spending as the retail sub-sector delivers the biggest contribution to Q2 GDP growth, which edged up to 0.3 per cent, compared to 0.2 per cent in the previous quarter.

Services drove growth for the period between April and June up 0.5 per cent compared to a contraction in the production and construction sectors, suggesting the depreciation in the pound has not significantly changed the fortunes of manufacturers.

The fact that retail drove services growth is concerning given the squeeze on household incomes, says Schroders senior economist Azad Zangana.

“Higher household spending suggests the savings rate may have fallen even further from the record low recorded in the first quarter, which is surely unsustainable,” Zangana says.

“Meanwhile, if there is a build-up in inventories, then there should be a fall in output in the future as destocking will be required.”

Close Brothers Asset Management CIO Nancy Curtin says without significant economic momentum, it’s difficult to see an interest rate rise on the immediate horizon.

“However, at the same time, consumer credit levels are clearly causing a headache for Mark Carney. We may see some macro prudential action to tackle this, although this in turn may inhibit consumer spending, which has been so instrumental in recent economic growth.”

Zangana, who also sees a low chance of Bank of England action anytime soon, says Schroders forecasts some improvement in the second half of the year as inflation starts to abate.

“This suggests that employment growth should slow, and the unemployment rate may start to rise. Interestingly, the claimant count, which was once the preferred measure of unemployment by the government, has been rising in recent months.”

However, Architas senior investment manager Nathan Sweeney says Brexit is not to blame for the weak data arguing the UK economy has been slowing since well before the referendum.

“The bigger picture is that there has been a significant failure by the central bank to stimulate growth in the UK economy,” Sweeney says.

“It is clear that the central bank is now stepping back and will begin to withdraw its monetary stimulus in the form of quantitative easing, which while it staved off a full blown crisis has not succeeded in boosting long term growth.

“We are experiencing subdued low growth and that will persist unless we see the Government step in to stimulate the economy.”