UK growth drops sharply in Q1

UK GDP growth dropped sharply from 0.7% in the final quarter of 2016, to 0.3% in the first quarter in 2017.

According to Schroders senior European economist, Azad Zangana, the fall was due to higher inflation squeezing household spending. She commented: “We have been expecting a sharp slowdown in growth for some time as the depreciation in sterling has caused inflation to rise and, importantly, outpace wage growth. With the household savings ratio at a record low at the end of last year, it was inevitable that households would cut back spending.” She added that sectors with exposure to household spending, such as distribution, hotels and restaurants, saw the biggest contraction of 0.5% of GDP, while transport, communication and the storage sector contracted for the first time since 2013.

David Page, senior economist at AXA Investment Managers, said that slowdown was slightly below consensus expectations, and dominated by weaker consumer spending. Page added: “First estimates of GDP are often revised and some aspects of the weaker industrial production could end a little firmer, as electricity and gas production was particularly weak.” Page said that the slowdown should mean that the Bank of England will hold the base rate at 0.25% until 2019, saying of the monetary policy committee: “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.”

Zangana said that the downturn in growth is unlikely to have an impact on the UK general election on June 8th, saying: “The Conservative Party has a commanding lead in the opinion polls, which is unlikely to be significantly affected by such figures. Meanwhile, the Bank of England is likely to take a more dovish stance over the coming months. Any suggestion of a rise in interest rates will be toned down.”