UK GDP growth slumps in Q1; economists’ reaction

Shop-Shopping-Retail-UK-High-Street-700x450.jpgThe UK saw its slowest rate of growth for a year in Q1, undershooting analysts’ expectations, with economists divided in their reaction.

In the first quarter of 2017 the rate of UK GDP growth was 0.3 per cent, down from 0.7 per cent in Q4 and below the consensus forecast of 0.4 per cent.

Michael Baxter, economics commentator for The Share Centre, says the UK’s economic performance is “a disappointment” and diminishes the likelihood of a UK interest rate rise this year.

“It seems that the falls in the pound seen after the EU referendum are beginning to take their toll,” Baxter says. “Falling retail sales and sales in the accommodation sector meant that the UK’s key services sector only expanded by 0.3 per cent. Production also grew by 0.3 per cent, as did agriculture with construction expanding by 0.2 per cent. It is arguable that sterling may have fallen with or without the Brexit vote. What is clear is that recent rises in inflation are having an adverse effect.”

Ruth Gregory, UK economist at Capital Economics, says that a slowdown in GDP growth was inevitable after the strong rate seen in Q4, and dismissed it being the start of a sustained slowdown.

“The slowdown in GDP growth will no doubt prompt some suggestions that Brexit is now hitting the economy hard. But some slowdown after Q4’s 0.7 per cent rate had always seemed likely. And it is worth noting that the UK economy still looks likely to perform as well as the US in Q1,” Gregory says.

Gregory adds that the weak expansion in Q1 and rising inflation will mean their forecast of 2 per cent GDP growth this year is harder to achieve, but says spending growth should moderate rather than collapse and quarterly growth should stay between 0.3 per cent and 0.5 per cent in 2017.

David Page, senior economist at AXA Investment Managers, says the slower growth in Q1 is “fully consistent with our forecast for 2017 growth of 1.7 per cent” and expects the pace of growth to continue in the second half of the year after a slight pick up on Q2.

“Today’s 0.3 per cent clearly presents downside risks to the BofE’s 2 per cent GDP outlook for 2017,” Page says, adding that he expects interest rates to remain at 0.25 per cent until 2019.

“We think this will go some way to removing the unease expressed with August’s stimulus in the light of more resilient activity. Although we do not expect Kristen Forbes to reverse her vote for a rate hike in May, other members of the Committee are likely to be more comfortable with the overall policy stance with more visible signs of economic deceleration in the UK.”