Official data show the British economy has undergone a sharp slowdown in early 2017 as surging inflation has brought about an unprecedented decline in consumer spending. (Photo by Reuters)
Official data has confirmed that the British economy slowed in the first three months of the year, with growth of 0.2 percent on weaker spending by consumers.
“Growth (from the final quarter of 2016) was driven by output from the business services and finance, and construction industries, partially offset by declines in some consumer-focused industries,” the Office for National Statistics said in a statement on Friday, confirming an earlier estimate.
Gross domestic product (GDP) growth had stood at 0.7 percent in the final quarter of last year, while the first-quarter reading of 0.2 percent was the weakest for a year.
Consumers are being hit by surging British inflation, which stands close to a four-year high at 2.9 percent, as a Brexit-fuelled slump in the pound pushes up import costs.
This week however has seen sterling rally thanks to comments from Bank of England governor Mark Carney hinting at an interest rate hike, possibly before the end of the year.
While inflation is rising fast, growth to wages is not keeping pace and this may delay the BoE from lifting its record-low interest rate, according to analysts.
Howard Archer, chief economic advisor at the EY ITEM Club research group, noted that "first quarter GDP growth was held back by a marked slowdown in consumer spending amid an increasing squeeze on purchasing power".
Separately Friday, a survey showed that consumer confidence in Britain fell to the lowest level since July 2016, or soon after last year's referendum in favor of Brexit.
The GfK/NOP index of consumer confidence dropped to minus 10 points in June from minus 5 in May.
“It seems likely that the weakening in confidence reflects consumers' worries about the impact of higher inflation on their spending power, given evidence that wage growth has remained fairly week,” said Paul Hollingsworth, an economist at Capital Economics research group.
He added that some of the decline in sentiment could be attributed to”a fall-out from the election result, which has raised political uncertainty.”
Britain's economy is slowing as surging inflation cuts consumer spending and raises household debt, data showed Friday, causing a headache for the Bank of England on whether to hike rates.
Global market sentiment has this week been dominated by central banks, including the ECB, signaling that an end to the era of cheap money was drawing near -- prompting analysts to speculate that the BoE could soon decide to raise its record-low interest rate of 0.25 percent.
But official data Friday showing that Britain's economy slowed in the first three months of the year, with growth of 0.2 percent on weaker spending by consumers, has once more clouded the outlook for the BoE.
May's narrow win
British Prime Minister Theresa May's government on Thursday narrowly won support in favor of its legislative program, highlighting the weakness of her Conservative Party which lost its majority in a shock general election result earlier this month.
May's personal authority is deeply damaged after calling the election three years early, hoping to go into Brexit negotiations with a strengthened mandate. But instead of a landslide win, she suffered a rebuff from voters which has left her exposed.
Only with support from Northern Ireland's small ultra-conservative Democratic Unionist Party was May's legislative program, known as the Queen's Speech, approved after 323 votes in favor and 309 against in the 650-seat UK parliament.
Wage concerns
Wages in Britain are meanwhile falling when measured against inflation, pushing consumers to take on extra debt and triggering the BoE this week to insist that retail banks have combined capital reserves of £11.4 billion ($14.5 billion, 12.9 billion Euros) by the end of next year.
The central bank noted that consumer credit for items such as cars jumped by 10.3 percent in the year to April, “markedly faster than... household income growth.”
Separate official data Friday showed that UK households are saving at an all-time low.
“The fall in the household savings ratio (to 1.7 percent) is undoubtedly in large part due to the squeeze on disposable income caused by a combination of flat average earnings and rising prices,” said Tom McPhail, head of policy at stockbrokers Hargreaves Lansdown.

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