UK economic activity more than halved in the first quarter of this year compared to the previous quarter. Households squeezed by higher inflation appear to have tightened their belts.
The preliminary estimate for UK GDP showed growth fell from 0.7% quarter-on-quarter at the end of last year to just 0.3% in the three months to March. This was lower than consensus estimates of 0.4%, but in-line with the Schroders forecast.
Inflation is outpacing wage growth
We have been expecting a sharp slowdown in growth for some time as the depreciation in sterling has caused inflation to rise and, importantly, outpace wage growth. With the household savings ratio at a record low at the end of last year, it was inevitable that households would cut back spending.
Within the details of the latest GDP release, sectors with exposure to household spending had the biggest negative impact on growth. For example, the distribution, hotels and restaurants sector saw a contraction of 0.5% of GDP, which was the first fall for the sector since the end of 2012. The transport, communication and storage sector also saw its first contraction since 2013.
Cost of living squeeze unlikely to affect election
Looking ahead, unless households manage to achieve higher pay growth, we are likely to see the cost of living squeeze continue into the second quarter. This makes it less likely we will see a rebound in the economy until the end of the year.
Could this impact the general election? Probably not. The Conservative Party has a commanding lead in the opinion polls, which is unlikely to be significantly affected by such figures. Meanwhile, the Bank of England is likely to take a more dovish stance over the coming months. Any suggestion of a rise in interest rates will be toned down.