Consumer slowdown means new headwind for resilient GDP

Consumer slowdown means new headwind for resilient GDP
How UK growth has shaped up since 2014

Buoyant consumer spending has left the UK on “a stronger footing”, even if inflation means the driver of UK GDP growth starts to reverse in the coming quarters, according to economists.

Last week an initial estimate by the Office for National Statistics (ONS) showed UK economic growth rose by 0.6 per cent in the fourth quarter of 2016, the third such rise in a row and one which again beat expectations.

The ONS noted that growth was “dominated by services”, where output rose by 0.8 per cent, offsetting flatlining figures for construction and industrial production.

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Consumer spending, in turn,  has been a significant driver of services growth. UK retail sales rose by 5.7 per cent year on year in November, according to separate figures from the ONS published last month.

But subsequent figures for December caught analysts off guard, rising by 4.3 per cent instead of the expected 7.2 per cent. Some economists have predicted that the strong retail sales figures for November represented consumers bringing purchases forward in anticipation of forthcoming price rises.

As a result they expect a further slowdown as rising inflation limits options in the absence of notable wage growth.

Schroders senior European economist Azad Zangana said: “Without stronger wage growth, households are likely to cut back on spending, especially on non-essential goods and services. 

“Therefore, we continue to forecast a slowdown in UK economic growth over the course of 2017. However, the latest figures place the economy on a stronger footing to be able to cope with the headwinds that are coming.”

A better sign in the fourth-quarter figures came from manufacturing. The sector grew by 0.7 per cent, reversing a third-quarter decline, and Capital Economics predicted a further boost from weaker sterling this year. This is despite some arguing that the presence of complex supply chains mean the benefits of a devaluation are less straightforward than they once were.

Ruth Gregory, chief UK economist at Capital Economics, said: “The balance of growth looks set to shift this year. The forthcoming rise in inflation will probably hit the recently strong-performing consumer services sector, while the more competitive exchange rate should help to bolster industrial activity.

“Growth still looks set to slow this year as higher inflation takes some of the steam out of household spending. That said, we don’t expect the slowdown to be too severe. For a start, the strong end to last year provides a solid base for growth in 2017.”

The ONS estimated GDP growth for 2016 as a whole stood at 2 per cent. Although down on the 2.2 per cent and 3.4 per cent readings for the previous two years, the figure puts the UK in a good light versus peers. 

The figure outstrips the 1.9 per cent recorded by Germany last year, and is likely to be ahead of full-year estimates for the US and eurozone, due to be published imminently.