UK: Economic momentum slows in H1 2017 – Lloyds Bank

The UK economy expanded by just 0.2%q/q in Q1 2017, well below the 0.6%q/q average pace recorded in the second half of 2016 and falling short of the Bank of England’s estimate of 0.4%q/q, notes Nikesh Sawjani, Research Analyst at Lloyds Bank.

Key Quotes

“Looking below the surface, even though we expect growth over the first quarter to be revised up to 0.3%q/q eventually, such poor momentum arithmetically makes the task of achieving a solid bounce-back in the Q2 all the more difficult. Taking the PMI surveys at face value, this would point to GDP growth of 0.4%q/q in Q2. However, based on the flow of available ‘hard’ data for the quarter so far suggests a 0.3%q/q pace looks more likely. That would set up calendar year growth of 1.6% in 2017 as a whole. That pace would be slower than both the 1.8% recorded for 2016 and the 1.9% in the Bank of England’s May Inflation Report.”

“Much of the slowdown this year reflects the impact of weaker consumer spending. While retail sales rose 1.5% in the second quarter, this follows a 1.4% fall in Q1 and leaves the level of retail activity no higher than it was in Q4 of last year. Meanwhile, the savings ratio fell to a historic low in 2017 Q1. With consumers experiencing a squeeze on purchasing power as sterling’s post-referendum drop induces rising inflation, their appetite to continue to pare back savings may prove limited.”

“On our forecasts, the adverse effects of rising prices dominate the boost to net exports from the 13% sterling depreciation in effective terms since the referendum, and 19% since the mid-2015 peak. Higher prices of capital goods will act as a deterrent to investment spending; business investment was already broadly flat over the course of 2016, and the medium-term political and economic backdrop remains uncertain. As prices rise and the resilience of recent growth momentum fades, we expect GDP growth in calendar year 2018 to ease back to 1.4%, below our estimate of trend. That pullback from stronger momentum in 2017 is reinforced by the re-profiling of the fiscal headwind implied by the Chancellor’s 2017 Spring Budget, which set up a modest fiscal boost in FY 2017/18 which is recouped through a commensurately bigger drag in future years.”