LONDON -- The UK economy slowed more sharply than initially estimated in the first quarter as both consumer spending and net trade both dragged on growth.
Gross domestic product rose 0.2%, less than the 0.3% published late last month and down from 0.7% at the end of 2016. Growth in services - the biggest sector of the economy - and production were both revised down from initial estimates.
The report from the Office for National Statistics also showed that exports fell 1.6% and net trade knocked 1.4 percentage points off GDP. Consumer spending weakened, with household activity contributing the least to the economy since 2014.
The sharper-than-anticipated slowdown is another sign that Brexit is hitting the economy hard, as accelerating inflation coupled with muted wage growth puts the squeeze on households. Economists forecast little pickup in the pace of quarterly expansion through the rest of 2017, and the deteriorating outlook is also reflected in the Bloomberg Brexit Barometer, which is now at its weakest since November.
The pound maintained its recent gains against the dollar after the data were released, and was at $1.2987 as of 9.45am London time, up 0.1% on the day.
Consumers and businesses have also been affected by the surprise election early next month, while the buildup to the Brexit negotiations has been marked by tensions, raising questions about what type of exit deal Britain will be able to forge with the European Union.
The pickup in inflation is largely due to the pound’s 16% plunge since the Brexit vote in June. That has pushed up companies’ import costs, and department store Marks & Spencer Plc this week referred to the “tough trading environment”.
The poor performance of trade in the first quarter given sterling’s depreciation reinforces the view that while it may be helping exporters’ margins, there’s been limited impact on the broader economic picture.
Rate Outlook
For the Bank of England (BOE), the latest GDP figures may harden the view among policy makers about maintaining support for the economy. The bank had expected GDP in the first quarter to be revised up to 0.4%.
Governor Mark Carney has warned of a “challenging time” ahead for consumers, and a survey this week showed that an Easter-driven pickup in retail sales in April hasn’t been sustained into this month.
“In the near term a sharp downturn looks unlikely, but growth will probably remain tepid,” Dan Hanson, an economist at Bloomberg Intelligence (BI), said in a report on Wednesday. He forecasts that foreign demand won’t offset an expected slowdown in domestic spending growth over the coming two years.
Mr Carney has indicated that even with higher inflation ahead, he’s in no rush to raise interest rates from a record-low 0.25%, pointing to weak wages and few signs of domestically generated inflation pressures.
For BI and other forecasters, that means the BOE could be on hold until 2019, after the country has left the EU.