UK growth slows as consumers tighten their belts

After recording a remarkably healthy 0.7 per cent growth in the final quarter of 2016, GDP grew by only 0.3 per cent in the first three months of this year, below economists’ expectations of 0.4 per cent.The figures from the Office for National Statistics (ONS) showed that the slide had been largely due to a decline in the all-important services sector, which accounts for more than three-quarters of the nation’s GDP, largely as a result of reduced consumer spending, especially in the retail sector.In a statement, the ONS said, “There were falls in several important consumer-focused industries, such as retail sales and accommodation. This was due in part to prices increasing more than spending.”Within the services sector, hotels, restaurants and distribution companies saw a 0.5 per cent fall. There was also a sharp decline in growth in the construction sector, but manufacturing recorded a 0.5 per cent rise, mainly due to a jump in motor vehicle production.

A “resilient economy”

Chancellor of the Exchequer Philip Hammond told Sky News that, despite the GDP slowdown, the UK economy was still in good shape. “Employment at record highs and it’s set to go higher still,” said Mr Hammond. “The British economy is resilient.”Rain Newton-Smith, chief economist at the Confederation of British Industry, commented, “GDP growth has eased compared to the second half of last year, with weakness particularly apparent in consumer-facing services.“This chimes with signs that some of the recent supports to growth are softening. In particular, real wage growth has deteriorated, as inflation is now running up against earnings growth. With inflation set to continue rising, the pressure on household incomes will weigh on consumer spending.“As the UK looks to redefine its role in the world, the next government must deliver an industrial strategy that builds on our already solid foundations. A focus on improving openness, innovation and inclusivity will boost productivity and living standards, helping to make us the most competitive economy in the world by 2030.”Suren Thiru, head of economics and business finance at the British Chambers of Commerce, said the nation appeared to be entering a sustained period of more sluggish growth, which the calling of a general election in June would not help ease.

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Businesses under pressure to increase prices

He said, “Inflation is expected to continue to rise, increasing the squeeze on consumer spending power and firms’ profit margins, pushing growth lower. The BCC’s own Quarterly Economic Survey confirms that inflation is a key risk to the UK’s growth prospects, with businesses under increasing pressure to raise prices. Uncertainty over the impact of Brexit and the distraction of a general election are also likely to weigh on economic activity over the near term.”Alan Clarke, an economist at Scotia Bank, felt the slowdown might well be blamed on Brexit. “That is probably fair, albeit in an indirect sense,” he said.“The fears leading up to Brexit were that growth would stall due to a dive in confidence, hiring and investment. That hasn’t happened. What did happen is the pound dived, pushing inflation sharply higher and that is causing consumer spending and hence overall growth to slow.“The good news is that the surge in inflation is probably temporary and the squeeze on growth should pass. However, it is probably going to take another year before growth is back on an upwards trajectory.”

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