James Smith, Economist at ING, explains that after a remarkably strong run through 2016, the UK economy has started to slow as consumers cut back on spending.
“The UK economy grew by just 0.3% in the first quarter, weaker than expected and is a noticeable slowdown on the fourth quarter. We only get limited details at this stage, but it’s clear that the all-important service sector is beginning to cool. At 0.3%, services output grew at the slowest rate in two years.”
“When we talk about services, we are largely referring to consumer activity. That’s started to take a hit as the fall in the value of the pound filters through to prices. We expect inflation to surge above 3% this year, and given that wage growth has been more subdued, real incomes are starting to fall. Having been ‘spend spend spend’ towards the end of 2016, we’re starting to see consumers respond to this squeeze. Consumer confidence has fallen and various measures of household spending have disappointed.”
“This household squeeze is likely to be compounded by the effect of Brexit uncertainty, which may increasingly deter firms from hiring/investing. Whilst trade should perform better thanks to the weaker pound, we don’t expect this to be enough to prevent growth gradually slowing through this year.”
“For these reasons, we don’t expect any action from the Bank of England until the outcomes of the Brexit negotiations become clearer and uncertainty dissipates. We aren’t expecting a rate hike before 2019.”