In the first quarter of this year, there was a noticeable slowdown in the momentum of the UK economy. Quarterly economic growth has declined to 0.3%. Considerably higher growth of 0.7% was achieved in the final quarter of 2016. This slowdown could be seen as a reflection of the economic response to the Brexit process, which has just been initiated. At best, we regard this as only plausible to a limited extent.
The development in the individual economic sectors is based on rather strong growth contributions from the manufacturing industry as well as the construction and oil industries. All segments played their part in the GDP growth – a situation that was relatively rare in the past in these highly volatile sectors and given the chronically weak development of UK industry. It is therefore to be understood as positive. However, the relatively weak growth in the service sector of just 0.3% on the previous quarter is notable. It is the lowest growth recorded in two years. Accounting for a very high share of almost 80%, the service sector is the backbone of the UK economy and has consistently provided solid growth contributions in recent years. The current weakness is above all concentrated in industries that are closely linked to consumers, such as gastronomy and retail, for which the value added in fact declined at the start of the year. By contrast, the financial sector continues to record strong growth.
We believe that the propensity to buy among UK consumers has above all been negatively affected by the considerable rise in consumer prices in recent months. The still relatively slow development of salaries was recently barely able to keep pace with inflation and will probably have curbed the purchasing power of private households. This is of course an indirect consequence of the Brexit process, as the devaluation of the pound is gradually driving consumer prices up. However, the upturn in the price of crude oil last year is largely responsible for the recent rise in inflation, although this is an effect that has now gradually run its course.
We assume that the UK economy will already be affected during the next two years of Brexit negotiations and consequently before it actually leaves the EU. After growth proved to be surprisingly robust and resilient in the second half of 2016 following the Brexit vote, this effect will most likely fade away slowly and gradually. It is less likely that economic momentum will now just come to a stop. This is also supported by sentiment surveys, which continue to suggest that the economic climate is favourable. Nonetheless, fluctuations are certainly possible and the loss of momentum should be viewed in conjunction with the very good growth in the previous quarter. It cannot be ruled out that there will be a further acceleration in growth in the current quarter. At yearly level, growth has increased from 1.9% to a very solid 2.1%. The UK consequently remains at the forefront among the major industrial nations.