The British economy came to a virtual standstill at the beginning of this year. According to a first official estimate, economic growth, which was already clearly faltering last year, increased by only 0.1 per cent in the first quarter compared to the previous three-month period – its lowest rate for five years. Annual growth slowed to 1.2 per cent. At the end of last year the figure was still 1.4 per cent, compared to 2.1 per cent at the beginning of 2017. The UK is thus consolidating its position at the bottom of the G7 growth league.
The most significant braking effect came from the construction sector, which contracted by 3.3 per cent on the previous quarter, the sharpest fall since the beginning of 2012. This sector has already been faltering for a year after the boom of previous years. However, the important service sector also achieved only below-average growth of +0.3 per cent. Figures for consumer-facing services such as retail stagnated, and hotels and restaurants were very negative again. Finally, the manufacturing sector also lost considerable momentum with meagre growth of 0.2 per cent.
The weak growth is unsurprising. On the one hand, unusually severe winter weather in the British Isles impacted on the unimpressive growth performance in February and March – particularly in the construction sector and private consumption. However, according to the Office for National Statistics, the overall contribution here was comparatively small. The negative repercussions of the approaching Brexit, which have already been increasingly weighing on the British economy for a year, are also nevertheless likely to have had a particularly adverse impact at the beginning of this year: weak consumption, which is suffering from higher inflation caused by the weak pound; construction activity, hit by faltering demand, particularly in the City of London. The extraordinary economic conditions associated with Brexit are continuing to leave their mark.
Buoyant exports had previously cushioned the negative effects. However, this “shock absorber” is becoming less effective as momentum for the global economy also slows due to heightened uncertainty, and growth in the UK’s most important trading partners also stutters. The weak trend in industry may already be a foretaste of things to come here. We do expect the British economy to at least make good the weather-related shortfalls in the current quarter and to gain pace again slightly. Overall, growth is nonetheless likely to remain muted over the rest of the year. We have also therefore recently cut our 2018 growth forecast for the UK from an already low 1.3 per cent to 1.0 per cent.
We are also sceptical about next year. If agreement can be reached in current Brexit negotiations on a clearly defined model for future trade relationships – for example the “sensible solution” which we favour of the UK remaining in the customs union – the British economy could start to recover in 2019. However, politicians in London are deeply divided on this issue, and the likelihood of this solution being adopted is by no means certain. If Brussels and London do agree next spring to “only” begin negotiations on a free trade agreement, a high degree of uncertainty will persist for the British economy for some considerable time. Economic growth would also then be unlikely to exceed one per cent next year.