Economic update: Growth slows at home and abroad

Growth has slowed in recent months, while a faltering international economy and Brexit uncertainties pose risks to the outlook. Meanwhile, consumer spending remains the anchor of growth prospects.

GDP growth is slowing

After expanding by 0.5% over the first three months of the year, economic growth has subsequently been slowing. Latest data show GDP growth of 0.3% in the three months to May 2019. Part of this slowdown was due to several car manufacturers bringing forward planned annual shutdowns of their plants to April, intended to follow the UK’s original departure date from the EU.

A bar chart showing GDP growth throughout 2018 and to May 2019. It shows that growth is easing after a relatively strong start to the year. In the first quarter of 2019 it grew by 0.5% and from March to May by 0.3%.

The services sector provided most of the contribution to growth over this period, with the IT, communications and retail sectors in particular performing well. However, activity in the services sector – which accounts for around 80% of GDP – has slowed in recent months. Growth of 0.3% in the three months to May 2019 is down from its recent peak of 0.8% during summer 2018.

A line graph showing the services sector slowing during 2019. From March to May 2019 it grew by 0.3% .

The next full release of GDP data will be on 9 August and will contain the first estimate of GDP growth for the second quarter (Q2) of 2019. Given the data already published for April and May, and fairly downbeat surveys of business activity, most economists expect quarterly growth to be close to 0.0% in Q2. This compares with growth of 0.5% in Q1, which was probably boosted somewhat by manufacturers stockpiling ahead of the original date of Brexit.

Slower global growth

Growth expectations for the second half of the year remain modest. Brexit uncertainties – including the possibility of a no-deal departure from the EU – loom large over the outlook, and the global economy has been weakening of late. The escalation of global trade tensions, most seriously between the US and China, have hit global trade as a whole. Global growth was described as “sluggish” by the IMF on Monday (22 July), in its fairly downbeat assessment of the world economy.

Against this backdrop, UK exporters face a difficult environment. It therefore seems unlikely that net trade – the difference between exports and imports – will make a positive contribution to GDP growth in 2019.

Consumer spending remains robust as wages rise

It’s not all doom and gloom, however. Consumer spending has held up well so far this year. In Q1, quarterly growth hit a two-year high of 0.7%, while retail sales data for Q2 also showed robust growth.

The outlook for consumer spending is supported by accelerating average wage growth. In the three months to May, average weekly pay excluding bonuses increased by 3.6% compared with the year before, the highest growth rate since 2008. Growth was boosted by pay increases for some NHS staff and the increase in the National Living Wage (the minimum wage for those aged 25+).

A line graph showing average earnings growth accelerating. It is rising in 2019.

With CPI inflation currently at 2.0%, real (inflation-adjusted) average earnings growth looks set to bolster household budgets, at least over the short term. The joint-lowest unemployment rate (3.8%) since 1975 and an employment rate (76.0%) close to record highs provide further support.

As has been the case so many times in the past, UK growth prospects seem to be reliant on consumers and their ability to keep spending.

Further reading


About the author: Daniel Harari is a Senior Library Clerk at the House of Commons Library, specialising in UK and international economies.