Consumers Drive U.K. Economy as Investment, Exports Decline

Updated on
  • Household spending posts fastest growth in almost a year
  • Fall in business investment to stoke EU referendum debate

U.K. consumers stayed resilient in the first quarter in the face of the referendum on European Union membership.

Household spending rose 0.7 percent, the fastest pace in almost a year, the Office for National Statistics said on Thursday. The gain helped to offset falling exports and business investment. Economic growth overall slowed to 0.4 percent from 0.6 percent in the fourth quarter, unrevised from an initial estimate.

The mixed picture will fuel the debate over how far the June 23 referendum is damaging the economy. While the uncertainty may be taking a toll on hiring and investment, Brexit campaigners argue consumers are in good health and a wider slowdown would be happening anyway given the weakness of global growth.

The Bank of England cut its growth forecast this month and policy maker Gertjan Vlieghe has said that the economy may require more stimulus even in the event of a vote to remain in the EU.

“The worst start to a year in financial markets since 2008 and heightened uncertainty over the U.K.’s fate in the EU damped growth momentum at the start of the year,” said Kallum Pickering, an economist at Berenberg Bank in London. “Domestic demand provided all of the growth. Further slowdown in Q2 ahead of the EU referendum is likely before growth accelerates” in the second half.

Trade Drag

The pound weakened 0.3 percent against the euro to 76.16 pence as of 2 p.m. London time. It was little changed at $1.4703.

The U.K. economy has expanded for 13 consecutive quarters, but the recovery from the financial crisis has been uneven with consumer spending and services accounting for almost all of the gain.

In the first three months of the year, investment fell 0.5 percent as spending on non-residential buildings such as schools and offices declined. It followed a 2 percent drop in the fourth quarter caused by the disposal of transport assets. Exports fell 0.3 percent, and net trade knocked 0.4 percentage point off growth.

While services saw their growth rate slow to 0.6 percent, a surprise 0.1 percent drop in output in March hinted at weakness going into the second quarter. Industrial production and construction shrank, while the economy as a whole grew 2 percent from a year earlier, the slowest pace in three years.

U.S. Growth

The figures come a day before the U.S. publishes revised estimates for the first quarter, with economists predicting annualized growth of 0.9 percent. Annualized growth in the U.K. was 1.4 percent.

The latest figures also show the compensation of employees, the widest measure of remuneration, rose 0.7 percent in the first quarter as the number of people in work grew. GDP per capita -- a measure of living standards -- climbed 0.2 percent.

While the economy as a whole returned to its pre-recession size in 2013, population growth meant that Britain remained poorer on a per capita measure until last year.

(Adds data on services, updates pound.)
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