U.K. economic growth likely to reach 1.6 pct in 2017 and slow to 1.4 pct in 2018 – Lloyds Bank

The pace of U.K. economic activity rebounded in the second quarter, with the preliminary data showing that the economy expanded 0.3 percent quarter-on-quarter. While this shows an acceleration from the first quarter’s growth of 0.2 percent, looking at both quarters together imply that the rate of economic growth has decelerated sharply in the first half of 2017 as compared with the second half of 2016, when it averaged 0.6 percent quarter-on-quarter.

Taking the July PMI surveys and the restricted amount of ‘hard’ data for the quarter so far at face value, this would indicate towards GDP growth staying around 0.3 percent quarter-on-quarter in the September quarter.

“Even though we expect growth over the first half to be revised up eventually, at this stage, the momentum looks set to deliver calendar year growth of 1.6 percent this year”, noted Lloyds Bank in a research report.

The rate is expected to be slower than both the 1.8 percent recorded for 2016 and the 1.7 percent in the Bank of England’s August Inflation Report. Most of the deceleration this year shows the impact of weaker consumer spending.

Retail sales grew 1.5 percent in the second quarter and further 0.3 percent in July, but it follows a 1.4 percent decline in the first quarter and leaves the level of retail activity no higher than it was in the fourth quarter of last year. In the meantime, the savings ratio dropped to a historic low in the first quarter of 2017. With consumers experiencing a squeeze on purchasing power as sterling’s post-referendum drop induces rising inflation, their appetite to continue to pare back savings might prove limited, stated Lloyds Bank.

The negative impacts of rising prices dominate the boost to net exports from the 13 percent sterling depreciation in effective terms since the referendum and 19 percent since the mid-2015 peak. Higher capital goods prices are expected to act as a deterrent to investment spending; business investment was already widely flat in the course of 2016, and the medium-term political and economic backdrop continues to be uncertain.

“As prices rise and the resilience of recent growth momentum fades, we expect GDP growth in calendar year 2018 to ease back to 1.4 percent, below our estimate of trend”, added Lloyds Bank.

At 18:00 GMT the FxWirePro's Hourly Strength Index of British Pound was slightly bearish at -64.7647, while the FxWirePro's Hourly Strength Index of US Dollar was slightly bearish at -69.4574. For more details on FxWirePro's Currency Strength Index, visit http://www.fxwirepro.com/currencyindex

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