Image: Nicolas Raymond/FlickrBoth the UK and US economies saw a significant slowdown in growth in the first quarter, but the UK slowdown might pose bigger reasons to worry – Brexit may be a factor.
For growth in US GDP, every first quarter since 2011 has been a disappointing. The weather and other seasonal factors seem to be to blame. Q1 of 2017 was no exception, with growth slowing to a crawl – but then that is the pattern of this decade.
In the UK, growth also slowed, but this time it may have been more serious – with Brexit the probable cause.
The UK economy grew by 0.3 per cent in Q1 – quarter on quarter, with the key services sector slowing sharply after the retail sector saw contraction. In Q4 of last year, GDP grew by 0.7 per cent, so that was quite a slowdown.
In the US, data on growth is provided as an annualised statistic. In Q1 of 2017, US annualised growth was just 0.7 per cent, from 3.5 per cent in Q4 2016.
But with US Consumer Confidence hovering around a 16 year-high, it maybe that we can put the slowdown to the weather.
In the UK, rising prices got the blame, at least the ONS, which produces the data together, put it down to rising prices. And prices rose thanks to the Brexit related falls in sterling.
Looking at the UK stats, Samuel Tombs Chief UK Economist, Pantheon Macroeconomics, said: "One quarter of slow growth is not definitive proof that the economy is on the ropes. But the pressure on consumers’ incomes looks set to build this year as retailers pass on higher import prices; we still expect CPI inflation to exceed three per cent in the second half of this year. Meanwhile, firms’ investment plans remain depressed due to Brexit risk, while the competitiveness of exports has improved only marginally, despite sterling’s depreciation, because exporters have hiked prices. As a result, it’s hard to see other parts of the economy fully compensating for sluggish growth in consumers’ spending. We continue to expect quarter-on-quarter GDP growth to average just 0.2 per cent over the remainder of 2017.”
As for the US, Paul Ashworth, Chief US Economist at Capital Economics said: "The slowdown in the first quarter this year was principally due to a near-stagnation in consumption, which increased by only 0.3 per cent annualised. Household spending was held down by a drop back in motor vehicle sales from a near-record high at the end of last year and the unseasonably warm winter weather, which depressed utilities spending. But consumer confidence is unusually high and real personal disposable income increased at a four per cent annualised pace in the first quarter. Consumption growth will rebound in the second quarter.
He added: "As long as employment growth rebounds in April and May, there is no reason for the Fed to stand pat, particularly not if financial conditions remain this loose.”
What this all probably means is that UK interest rates are likely to stay on hold for the foreseeable future, but up again very soon in the US. That should lead to further falls in sterling against the dollar – assuming that this effect is not already discounted by the markets.
