Economic Indicators, May 2017

Summary

Over the past month there’s been a lot of economic data….and a decision to hold a General Election on 8 June. So in this last economic update before the election, we focus on the latest GDP growth data for early 2017. Growth was somewhat lower than in recent quarters, with the first indications that consumers are beginning to tighten their belts.

GDP growth slowed in early 2017…

Economic growth slowed in the first three months of 2017, following healthy growth in the second half of 2016. GDP rose by 0.3% in Q1 2017 compared with the previous quarter, down from 0.7% in Q4 2016.

…as consumers reined in their spending…

The principal cause of the weaker start to 2017 was the crucial services sector – accounting for around 80% of the economy – which grew by just 0.3% in Q1 2017, its weakest quarterly increase since Q2 2013. In particular, consumer-focused services (such as the retail sector) saw their output fall in Q1 2017 for the first time in over four years, after outperforming other service sectors in recent years and driving overall GDP growth.

With overall annual inflation rates now roughly equal to average wage rises, household finances are being squeezed again following two years of real-terms earnings growth (when inflation was very low). This was anticipated given the fall in sterling since the EU referendum which has led to inflation increasing in recent months.

…although export growth could be accelerating

If consumer spending is going to remain more restrained than in recent years, the key question for the economic outlook is whether other sectors of the economy can step in to provide the impetus to growth. Many have looked towards exporters to do this, who could well benefit from the lower pound increasing the price competitiveness of their products in international markets.

It’s too early to tell for sure, but there are signs that export growth is accelerating – exports in Q4 2016 were up strongly – although whether it will be able to make up for the expected slowdown in consumer spending remains to be seen.

Other economic developments

A quick summary of other economic news over the past month:

• The public sector budget deficit was £52 billion in 2016/17, equivalent to 2.6% of GDP. This is a decrease of £20 billion compared with the £72 billion borrowed in 2015/16, and is the lowest level of borrowing since 2007/08.
• Consumer price inflation remained unchanged in March 2017 at 2.3%, although economists expect it to rise in upcoming months.
• The unemployment rate was 4.7% in the three months to February 2017, the lowest it’s been since 1975.