UK GDP growth remains low as household spending slows
By Oliver Haill
Date: Thursday 24 Aug 2017
(ShareCast News) - UK gross domestic product growth remained among the lowest in Europe in the second quarter amid a slowdown in household spending and business investment, with growth largely dependent on government spending.
The Office for National Statistics said on Thursday that GDP rose 0.3% in the three months to June compared to the previous quarter, in line with its initial estimate last month and up from the 0.2% in the first quarter.
Low UK growth, which is half that of the 0.6% generated in the eurozone in the same quarter and the slowest growing G7 economy this year, came amid a slowdown in growth in household spending to just 0.1% from 0.4% in the first quarter and with no growth in business investment after the 0.6% expansion in the first three months of the year.
Private consumption growth slowed to its weakest rate since the end of 2014, not helped as real wages fell 0.5% in the quarter in spite of a 42-year low in unemployment, while government spending and public investment were fairly strong in the quarter.
There was an improved contribution to national growth from net trade, which provided no drag in the quarter after exerting a 0.8 percentage point drag at the start of the year.
The index of services grew 0.4%, up from the revised 0.3% estimate and better than the forecast dip to 0.2%. For the three months to end-June, the index was up 0.5% as expected.
"GDP has slowed markedly in the first half of the year with relatively robust services growth, partly thanks to a booming film industry, offset by weak performances from manufacturing and construction in the second quarter," Darren Morgan, head of gross domestic product at the ONS.
"Household spending grew weakly, with the lower-value pound hitting household budgets, while business investment showed no growth at all."
Economist Samuel Tombs at Pantheon Macroeconomics said the UK economy was one of the slowest growing developed economies "because Brexit risk has dampened business investment and sterling's depreciation has hurt consumers more than it has helped exporters".
With net trade making a neutral contribution to GDP growth, this means that trade has dragged on GDP growth since sterling first began to depreciate at the end of 2015, he said, noting that by contrast, it had boosted GDP growth at the same stage after all other past post-war depreciations.
"Looking ahead, we expect the economy to continue to struggle, with GDP rising by just 0.2% in both Q3 and Q4. Recent surveys of export orders have picked up, but exporters are too reliant on imports for net trade to fully offset a further slowdown in consumers' spending.
"Indeed, CPI inflation still has further to climb, and the sharp fall in consumers' confidence over the last two months suggest that households won't continue to cut their saving rate. Meanwhile, we expect Brexit risk to increasingly bear down on business investment as the U.K.'s exit date draws nearer."
While the second estimate confirmed that the economy maintained a fairly sluggish pace, Paul Hollingsworth at Capital Economics, was more optimistic about the second half.
Looking for encouragement he pointed to an improving contribution to growth from net trade, government spending, and public investment and added that the slowdown in household spending was partly driven by a fall in spending on cars, which probably reflected shifting purchases to beat the change in vehicle excise duty earlier this year.
"What's more, survey measures of firms' investment intentions suggest that Q2's slowdown in business investment will prove short-lived," Hollingsworth said. "And firms' export orders continue to point to a strengthening in export growth. Finally, the economy appears to have picked up pace over the course of Q2, with a decent monthly rise in services output in June revealed in today's figures too.
"This sets a good base for growth in Q3. As a result, we remain optimistic that a modest acceleration in growth in the second half of the year is in prospect."
Howard Archer, chief economic advisor to the EY ITEM Club, said with the economy currently showing little overall evidence of picking up speed he expects GDP growth to be limited to 0.3% in the third quarter.
"The latest hard data points to ongoing consumer caution in terms of spending with retail sales weak in July. Meanwhile, survey evidence pointed to limited services activity in July and softer construction activity.
"Admittedly, manufacturing surveys have been healthy for July and August. However, healthy manufacturing surveys have yet to be reflected in the hard data and it also needs to be borne in mind that industrial production only accounts for 14.6% of total output (within that manufacturing is 10.3%).
"The latter months of 2017 looks likely to remain very hard work for the UK economy, resulting in ongoing limited growth.
"We see GDP growth limited to 1.5% in 2017, which would be the weakest performance since 2012 and down from 1.8% in 2016."
Looking to 2018, Archer said businesses are likely to remain cautious in their investment, "but much will depend on how Brexit negotiations proceed. If a transition agreement looks increasingly likely as the year progresses, this should be supportive to investment. Net trade should make a positive contribution to UK growth in 2018, as exports benefit from a still very competitive pound and decent global growth."
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