Slowdown in UK economy forecast as inflation bites

The UK economy looks set to have endured a first-quarter slowdown as inflation took a chomp out of household spending power.

Economists are expecting a marked dent in gross domestic product (GDP) when official figures are released on Friday, with growth slowing to 0.4% from 0.7% in the fourth quarter, as consumers tighten their belts in the face of rising living costs.

The bleak outlook has been compounded by dismal retail sales, which recorded their biggest fall for seven years in the three months to March.

Consumers are feeling the pinch, with inflation sitting at its joint highest level for more than three years at 2.3% last month.

While falling flight and fuel prices kept a lid on the overall cost of living, price tags on food and clothing kept climbing in March.

It comes as separate Office for National Statistics (ONS) figures published earlier this month showed household savings rates have hit a record low, as consumers plundered their nest eggs to keep spending.

Consumer debt levels are also on the rise, with members of the Bank of England's Financial Policy Committee (FPC) warning that the rapid increase fuelled by interest-free credit cards was posing a risk to the UK financial system.

Howard Archer, chief UK and European economist for IHS Markit, said the predicted first-quarter slowdown was "primarily the consequence" of consumers reining in their spending.

"The first quarter of 2017 has seen inflation rise markedly higher overall, while earnings growth has been muted.

"Following the likely marked first-quarter slowdown, we suspect that 2017 will become even more challenging for the UK economy - and particularly for consumers as their purchasing power is squeezed harder still.

"Additionally, we expect businesses to become more cautious over investment (and employment), as the economy shows mounting signs of slowing and uncertainties over the outlook are magnified by Brexit negotiations coming increasingly to the forefront now that the Government has triggered Article 50."

Output in Britain's construction and manufacturing industries remained under pressure in February, pointing to a slowdown in momentum for the UK economy.

Construction output fell by 1.7%, down from a revised reading of 0% in January, while industrial production output recorded a monthly drop of 0.7% compared with a decline of 0.3% the month before.

Britain's powerhouse services sector, which accounts for around 80% of the UK economy, also struggled for momentum in January, with output slipping by 0.1%, following a rise of 0.2% in December.

However, Bank of England policymaker Michael Saunders said last week that he expects UK economic growth and inflation to outstrip the central bank's previous forecasts.

He said inflation could hit 3% by the end of this year and has predicted GDP to expand by 2% through next year and 2018.

The bank previously forecast inflation to peak at 2.8% in the first half of next year and for GDP to grow by 1.6% in 2018.

Mr Saunders said the stronger-than-expected growth would be driven by rising business investment and exports, helping to offset the slowdown in consumer spending.

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