UK growth slows as consumer spending tightens

May 2, 2017

UK economic growth for the first quarter of 2017 came in at 0.3%. This was down from the strong 0.7% growth recorded in the final quarter of 2016 and below the 0.4% predicted by economists. A slowdown in the dominant services sector was the main contributor to the deceleration, primarily driven by weaker retail sales. While initial GDP forecasts are unlikely to remain unrevised, the sharp slowdown has given some cause for concern. While UK growth has been fairly resilient since the referendum, it has been the UK consumer that has supported the economy through increased spending. This has been funded by reduced saving and increased rate of unsecured borrowing. The expansion of credit card and personal loan growth has raised alarms at the Bank of England, who has now pressured banks into improving the acceptance criteria.


The most recent UK government borrowing figures came out last week, hitting a new post-crisis low. Government borrowing for the year to the end of March fell by £20bn to £52bn; this was broadly in line with forecasts. Furthermore, the stronger economic growth in 2016 has driven the borrowing as a percentage of GDP down to 2.6%. However, economists have warned that the reduction in borrowing has been driven by one-off factors rather than strong structural improvements. The timing of some self-assessment tax receipts, in particular, has flattered the borrowing figures, although these are likely to be reversed over time. Without additional budget cuts, it is forecast borrowing as a percentage of GDP will increase slightly over the next year.


In the US, GDP growth was at its lowest in three years. Similarly to the UK, growth was held back by a reduction in consumer spending. The recorded rate of an annualised 0.7% growth was the slowest since the first quarter of 2014, and a significant slowdown from the final quarter of 2016 where growth was 2.1% annualised. Furthermore, first quarter growth was wide of the 1.2% predicted by economists. While the growth figures are disappointing, the US economy remains near full employment and consumer confidence is at multi-year highs. The weak first quarter will now make it very difficult for Donald Trump to fulfil his pledge to increase GDP growth to 4% a year, without significant increases in labour productivity.



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The final round of the French election will be held next Monday, where centrist Macron is expected to win. German unemployment data for April will be released on Wednesday. In the US the Federal Reserve rate announcement will also be released on Wednesday, followed by non-farm payroll data on Friday.