U.K. Economy Weakens More Than Estimated, Growth Drops to 0.2%

25/05/2017 11:40 AST

The U.K. economy slowed more sharply than initially estimated in the first quarter as shoppers flagged and trade dragged on growth.

Gross domestic product rose 0.2 percent, less than the 0.3 percent published late last month and down from 0.7 percent at the end of 2016. Growth in services, the biggest part of the economy, and production were both revised down compared with the initial estimate.

The report from the Office for National Statistics also showed that exports fell 1.6 percent and net trade knocked 1.4 percentage points off GDP, equaling a record drag. Consumer spending weakened, with household activity giving the economy its smallest contribution since 2014.

The slowdown may be the first sign that Brexit is hitting the economy as accelerating inflation coupled with muted wage growth puts the squeeze on households. Economists forecast little pickup in expansion through the rest of 2017, according to Bloomberg’s monthly survey.

For consumers and companies, there’s also a surprise election early next month, while the buildup to the Brexit negotiations has been marked by tensions that’s raised questions over what type of deal Britain will be able to forge with the European Union.

Tough World

The pickup in inflation is largely due to the pound’s 16 percent plunge since the Brexit vote in June. That’s also pushing up companies’ import costs, and department store Marks & Spencer Plc this week said it’s a “tough trading environment.”

The poor performance of trade in the first quarter given the currency depreciation reinforces the view that while it may be helping exporters’ margins, there’s been limited impact on the broader economic picture.

For the Bank of England, the latest GDP figures may harden the view among policy makers about maintaining support for the economy.

Governor Mark Carney has warned of a “challenging time” ahead for consumers, and a survey this week that an Easter-holiday-led 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, 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.

Carney has indicated that, even with the faster inflation ahead, he’s in no rush to raise interest rates from a record low, 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.

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