The latest figures on UK GDP are out, and maybe, just maybe, the media, and indeed the public, will start to face up to a hard truth. Ever since the UK voted leave in the EU referendum, the economy has been slowing.
The UK economy grew by 0.1 per cent in Q1 of this year, slower than expected, and the weakest growth rate since the final quarter of 2012.
The pattern is clear, the economy has been slowing for around three years now, but over the last five quarters, the slowdown has gathered momentum.
The UK economy has gone from the fastest growing economy in the G7 18 months or so ago, to the slowest.
Will it continue?
The good news is that inflation has been falling. Wages are now growing faster than inflation, so that will help. The cold weather also hit the quarter hard, especially construction, which suffered a big contraction during the period. The collapse of Carillion also took its toll on construction.
What does this all mean?
The odds of interest rates going up soon, are receding fast.
Samuel Tombs, Chief UK Economist, at Pantheon Macroeconomics and who has taken a pessimistic stance on Brexit said: “The chance of a May rate hike is now close to zero.”
Paul Hollingsworth, Senior UK Economist, at Capital Economics, which has been more sanguine on Brexit, was less downbeat. He said: “The MPC (Monetary Policy Commtee) is unlikely to be confident enough in two weeks’ time that there isn’t some underlying weakness. As a result, we no longer expect the MPC to raise interest rates in May. Instead, we expect the MPC to raise them again in August. But if we are right in thinking that overall GDP growth should recover, then the bigger picture is still that rates are likely to rise faster than markets expect.”
As for the rest of the year, Mr Hollingsworth, said: “We think that this slow patch will prove to be transitory, if past experience is anything to go by. Note too that a recovery in real wages – which is now just about underway – should help consumer-facing areas of the economy to re-gain some momentum. That said, Q1’s weak out-turn makes our full-year forecast of 1.8 per cent pretty hard to achieve, barring an exceptionally-strong rebound in Q2.”
Mr Tombs said: “Looking ahead, GDP growth will likely will recover back to the 0.3 per cent-0.4 per cent rates seen last year; households’ real incomes are now recovering and, at the margin, the recently-agreed Brexit transition deal should make some firms more confident to invest. But with inflation falling much more rapidly back to its target than the MPC expected and wage growth still not building momentum, the MPC has the luxury of being able to delay raising interest rates in May to be sure that the Q1 slowdown was largely a weather-related blip. As a result, we stand by our long-held call that the MPC will raise the Bank Rate by 25 basic points just once this year and will wait until August to hike.”
Note that recent purchasing managers indexes, which have been pointing to a sharp slowdown in the UK economy for some time, are consistent with quarterly growth of 0.6 per cent in the euro area in Q1 and even stronger growth in the US.