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Economics

Schroders Quickview: UK growth slows ahead of Brexit vote

The UK economy appears to have hit a speed bump and we believe that growth is likely to remain sluggish until the result of the referendum is known.

27/04/2016

Azad Zangana

Azad Zangana

Senior European Economist and Strategist

How has the UK economy performed in Q1?

The Office for National Statistics (ONS) estimates UK GDP to have grown by 0.4% in the first quarter of 2016 – a slowdown compared to the 0.6% quarterly growth rate recorded previously.

Recent business surveys suggest nervousness amongst firms in the run up to the UK’s referendum on its EU membership, which may be prompting companies to postpone investment and hiring plans.

This was also evident in the business investment figures in the second half of last year and the most recent labour market statistics, which show a severe slowdown in employment growth.

Within the details of the GDP report, all of the growth in the first quarter came from the services sector which grew by 0.6%. Production, including manufacturing, contracted by 0.4%, while construction also contracted 0.9%.

The estimates released today are preliminary estimates, and may be revised up or down.

Has Brexit fears hit UK growth?

However, it appears that the economy has hit a speed bump. Growth is likely to remain sluggish until the result of the referendum is known.

If the UK votes to remain in the EU (our central view) then growth is likely to accelerate significantly in the second half of the year.

If, however, the UK votes to leave, then growth is likely to slow further on the back of the added uncertainty for businesses. For more on our analysis on the impact of a vote for Brexit see our article on The risks of Brexit.

Meanwhile, the Bank of England is in no rush to raise interest rates. Assuming the UK votes to remain in the EU, the Bank will then want to see evidence of a rebound in growth and higher inflation before considering raising interest rates. This may not happen until the end of this year or start of next.

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