UK economy suffers steeper slowdown in first quarter

The UK economy suffered an even deeper slowdown at the start of the year as the services sector came under pressure and inflation dealt a blow to household spending.

The Office for National Statistics (ONS) said gross domestic product (GDP) grew by 0.2% in the first quarter of 2017, revising down the figure from its initial estimate of 0.3%.

Economists had been expecting GDP growth to slow from 0.7% in the fourth quarter of last year, but they had pencilled in growth of 0.3% for the first three months of 2017.

The ONS said: "Consumer-facing industries such as retail and accommodation fell and household spending slowed.

"This was partly due to rising prices. Construction and manufacturing also showed little growth, while business services and finance continued to grow strongly."

The services sector put downward pressure on GDP after output was revised down to 0.2% from 0.3% for the first quarter.

It means the powerhouse industry, which accounts for 78% of the UK economy, slowed substantially from the 0.8% growth seen between October and December last year.

Household spending was also dragging on overall growth for the first three months of the year after eking out its lowest quarter-on-quarter growth since 2014 at 0.3%.

Sterling's slump since the Brexit vote has bumped up the cost of the living as manufacturers and retailers pass down rising import prices to consumers.

Inflation hit its highest level in nearly four years last month at 2.7%, as the Brexit-hit pound, electricity price hikes and rising air fares tightened the squeeze on household spending.

The Bank of England said earlier this month that inflation would peak at 3% later this year.

Despite the first quarter's inflation-induced slowdown, business investment grew by 0.6% over the period thanks to a boost from machinery and intellectual property products.

However, net trade shaved 1.4% off the quarterly GDP growth rate due a jump in the number of imports.

The statistics agency said manufacturing grew by 0.3% in the first quarter, while total production and construction expanded by 0.1% and 0.2% respectively.

It means GDP grew by 2% in the first quarter of 2017 compared with the first three months of last year, revised down from 2.1%.

Samuel Tombs, chief UK economist of Pantheon Macroeconomics, said the downward revision means the UK was now "tied at the bottom of the G7 growth leaderboard with the US and Italy".

He added: "Households' real spending increased by just 0.3% quarter-on-quarter in Q1 - the smallest increase since Q4 2014 - as the import-led surge in inflation eroded spending power.

"Households also appear to have reduced their saving rate to a new record low to fund extra spending, because the 1% rise in spending in nominal terms exceeded the 0.6% rise in employees' compensation.

"As a result, households have compromised their ability to fund further increases in spending over the coming quarters, when their real incomes will be coming under even more pressure from high inflation."

Ian Stewart, chief economist at Deloitte, added: "Just as expected higher inflation is squeezing incomes and spending.

"High inflation is hitting consumers, but a weak pound and a recovering global economy are helping businesses.

"UK growth is likely to tilt away from the consumer towards exports, manufacturing and investment this year. This should keep the UK economy growing at a similar rate to last year."