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The Office for National Statistics released the third estimate of the UK’s first quarter GDP that shows the economy expanded 0.4 percent q/q, unrevised from its previous estimate. This is consistent with consensus expectations. The year-on-year growth was also unrevised at 2 percent year-on-year. Additional timely estimates of UK’s services sector activity for April, released along with the GDP data, give further insight for the second quarter.
Services sector activity grew 0.6 percent on sequential basis in April. This does not imply any serious loss of momentum in the beginning of the second quarter, noted Lloyds Bank in a research report. The first quarter growth was mainly driven by services and consumer spending, according to the ONS data.
However, business investment declined in the first quarter. Gross fixed capital investment dropped 0.1 percent in Q1, revised down from an earlier estimate of 0.5 percent growth. But the PMI data available up to May indicates that the UK economic growth will decelerate further in Q2 to 0.2 percent, noted Markit Economics chief economist Chris Williamson.
“The drop in investment follows reports from business surveys that companies became increasingly reluctant to make investment commitments earlier this year as worries about Brexit coincided with signs of slower economic growth both at home and at the global level. The potential for the UK to leave the EU in particular creates uncertainty about returns on investments, meaning the Brexit vote is likely to have exacerbated the downward trend in investment," added Chris Williamson.
Meanwhile, manufacturing, trade and construction added to the drag to the downturn in investment. Manufacturing output declined 0.2 percent, while construction output fell 0.3 percent.
The first quarter current account deficit is estimated to have narrowed to 6.9 percent of GDP from the fourth quarter’s 7.2 percent. Deficit is estimated at GBP 32.6 billion in the first quarter as compared with GBP 34 billion in the last quarter of 2015.
The current account deficit might narrow in the months to come as the weaker pound might stimulate exports and aid drawing foreign investment. But business and investor sentiment need to rise in order to achieve this. Also, uncertainty needs to lift. Unless such sentiments are raised, the current account situation and the economy might deteriorate further in the months to come, added Williamson.
