UK economic growth slows in the first quarter as consumers feel the pinch

By Conor Lambe, Economist at Danske Bank

We may only be at the beginning of May, but 2017 has already been eventful. From a global perspective, Donald Trump has passed the 100 days in office milestone, while Emmanuel Macron and Marine Le Pen came through the first round of the French election and will compete in the run-off on 7th May.

In the UK, it has been no different. Undoubtedly, the most momentous event was the triggering of Article 50, when the UK Government formally announced its intention to leave the EU. We’ve also witnessed Nicola Sturgeon call for a second independence referendum in Scotland, and more recently, the announcement of a UK general election on 8th June. So, politically, much has unfolded this year, but what about the performance of the UK economy?

The initial estimate of economic growth in the first quarter of 2017 was published by the Office for National Statistics last week. These were preliminary numbers so they could be revised in the future, but the data showed that GDP growth slowed to 0.3 per cent in the first three months of this year, following an expansion of 0.7 per cent at the end of 2016.

This slowdown was felt across all the major sectors of the economy. Growth in production output, which includes manufacturing, slowed from 0.4 per cent in the fourth quarter of 2016 to 0.3 per cent at the start of this year. In the construction sector, growth fell back from 1.0 per cent to 0.2 per cent. And services, which make up nearly 80 per cent of GDP, experienced a fall in growth from 0.8 per cent in 2016 Q4 to 0.3 per cent in 2017 Q1.

Looking across the various data releases that cover the first quarter of this year, one theme in particular has emerged – the UK consumer is beginning to feel the pinch. The UK inflation rate was 1.6 per cent in December 2016, and it is currently on an upward trajectory. In March, inflation stood at 2.3 per cent, which marked the second consecutive month of above-target inflation in the UK.

Prices are expected to keep rising over the coming months and looking at producer price inflation can help explain why. While the rate of change of manufacturers input prices decreased in February and March, the current rate of 17.9 per cent is still relatively high. With businesses facing these considerable cost pressures, which are largely driven by the depreciation in sterling that followed the referendum, it is not surprising that they are having to raise their prices. So, in the short-term anyway, high inflation is here to stay.

The impact of this is being felt by the consumer. While not quite covering the first quarter, the latest data for December 2016 – February 2017 showed that real wages, which are adjusted for price changes, of employees in Great Britain were only 0.1 per cent higher than a year earlier. When you include bonus payments, which can’t always be relied upon, growth was also low at 0.2 per cent. With inflation rising and real wage growth approaching negative territory, household purchasing power is increasingly coming under pressure.

The effects of this were particularly evident in the retail sales data. In the first quarter of 2017, the quantity bought decreased for the first time since the end of 2013. As a result, retail trade was the service industry that made the largest negative contribution to UK GDP growth. Some other consumer-focused sectors, namely accommodation and the trade and repair of motor vehicles, also had a negative impact on overall economic growth. It would seem that the UK consumer decided to rein in some of their spending during the first three months of this year.

In Northern Ireland, there is no official output data for the first quarter of this year yet. However survey data suggests that, similar to the UK as a whole, some local businesses are under pressure to raise prices from higher costs. The 2017 Q1 Quarterly Economic Survey, published by the Northern Ireland Chamber of Commerce and Industry and BDO, showed that Northern Ireland ranks second among the twelve UK regions for the proportion of manufacturing businesses who mentioned the rising cost of raw materials as the key driver of higher prices. So with rising prices on the horizon, consumers in Northern Ireland are facing the same challenge as those across the water.

On the political front, the second quarter of 2017 is expected to be as busy as the first. The general election campaign has started, and in a number of weeks we’ll all find ourselves back at the polls. After the election, we’re likely to see the beginning of the face-to-face Brexit negotiations. But the big question now is will the UK’s economic performance in the second quarter also be similar to the first? If so, it will appear as if the slowdown that many people are expecting will be firmly underway.

This article was published in The Belfast Telegraph on 2nd May 2017.​​​

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