THE UK economy’s post-Brexit vote woes continued in the second quarter as it grew at less than half of its long-term average rate, and the manufacturing and construction sectors contracted.
Economists highlighted the impact of the squeeze on households arising from a surge in inflation, fuelled by sterling’s plunge after the vote to leave the European Union, as official figures revealed UK gross domestic product had grown only 0.3 per cent in the second quarter. The inflation surge has led to a renewed fall in wages in real terms.
Meanwhile, economists also cited a likely drag on business investment arising from uncertainty over Brexit, a situation that is forecast to continue.
The UK’s 0.3 per cent growth rate in the second quarter is equivalent to an annualised pace of about 1.2 per cent - less than half of a long-term average annual rate of expansion that has been put at about 2.75 per cent by Bank of England Governor Mark Carney.
In the opening three months of this year, growth was even weaker, at 0.2 per cent quarter-on-quarter. The UK grew by 0.7 per cent, around its long-term average rate, in the final quarter of 2016.
Sebastian Burnside, senior economist at Royal Bank of Scotland, said: “As prices rise faster than wages, households are seeing their budgets squeezed. Q2’s GDP growth shows how this is already affecting the economy, and how much more is to come.”
He added: “Even the growth we’re seeing…is at the expense of households borrowing more and dipping into their savings. That trend cannot continue indefinitely. It would be great for the consumer, and for shopkeepers, if wage rises would ride to the rescue and put more pounds in people’s pockets.
“But even with record low unemployment, that looks unlikely. So the squeeze is set and the sooner consumers rein in their spending growth, the smaller the restraint will have to be. Otherwise, the squeeze’s grip will tighten further.”
UK growth in the second quarter was driven by 0.5 per cent expansion in the services sector.
Manufacturing output dropped by 0.5 per cent quarter-on-quarter in the three months to June, and the construction sector contracted by 0.9 per cent.
Howard Archer, chief economic adviser to the EY ITEM Club think-tank, said: “The UK’s growth struggles continued in the second quarter.”
He added: “Not only was second-quarter GDP growth muted but it was entirely reliant on the services sector – which was estimated to have expanded 0.5 per cent quarter-on-quarter. This was up from services expansion of just 0.1 per cent in the first quarter, but was still below the growth rates seen through 2016. Services expansion was led by the distribution, hotels and restaurants sector, no doubt helped by the later Easter and also warmer weather.”
Annual UK consumer prices index inflation dipped from 2.9 per cent in May to 2.6 per cent last month but is nearly nine times its 0.3 per cent rate in May last year, before the Brexit vote.
Mr Archer believed there would likely have been some pick-up in consumer spending growth in the second quarter, after a sharp slowdown in the first three months of this year.
But he said: “Consumer spending is likely to be pressurised through the second half of the year by an ongoing appreciable squeeze on purchasing power. Indeed, real incomes growth is likely to remain negative for some months to come despite June’s dip in inflation. It is also notable there was a sharp dip in consumer confidence in June as uncertainties over the outlook were magnified by the General Election result.”
He added: “Meanwhile, worries over a stuttering economy and uncertainties over Brexit and the UK political situation are likely to weigh down on business investment.”
UK GDP in the second quarter was 1.7 per cent higher than in the same period of 2016. This represents a slowdown from year-on-year growth of two per cent in the first quarter.
Tim Roache, general secretary of the GMB trade union, said: “This Government’s economic plan is built on sand, and as it crumbles we’re all bearing the brunt.
“Working people are being hit time and time again by the Tories’ ill-judged, self-defeating austerity agenda - low wages, insecure jobs, a real-terms pay cut for millions of public sector workers, and an attack on housing and childcare support for those in work but struggling to make ends meet.”
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