31 Mar 2017

Q4 GDP unrevised, but the consumer squeeze begins to bite

Philip Shaw

Chief Economist

Quarterly GDP growth in the final three months of 2016 was left unrevised at the time of the 3rd estimate, remaining at +0.7% q/q, albeit still up on the initial preliminary estimate of +0.6%.

The consensus view was for no revision, but several economists (including ourselves) had expected an upgrade. Calendar year growth for 2016 remains as previously estimated at 1.8%.

The Q3 GDP estimate comes as part of the full National Accounts release providing an update to the sector by sector drivers and the expenditure components of growth were also published. There was an upward revision to output of the production sectors, taking growth over the quarter to 0.4% from 0.3% whilst construction sector output was lifted to 1.0% from 0.2%, as trailed in earlier releases. However output for the dominant services sector was left unrevised at 0.8%. Broadly the expenditure drivers of growth were similar to at the time of the 2nd estimate. Household consumption was seen as having risen by 0.7% q/q, having held in a resilient 0.7% to 0.8% q/q range throughout 2016, despite Brexit uncertainty. However we suspect that this is where the good news for household spending ends.

In particular, household spending momentum is likely to be squeezed as inflation tracks up further and we expect that to weigh on household consumption in Q1 and as the year progresses. Early sight of this came today in the Index of Services numbers published for January. This showed output falling by 0.1% after a modest 0.2% monthly rise in December and the 3m/3m growth in total services output slowed from +0.8% to +0.6%. The detail is more interesting still showing that the main protagonist was a slowdown in 3m/3m growth in distribution, hotels and restaurants, where growth slowed from +2.0% to +0.7% 3m/3m and where output fell by 0.7% m/m in January alone. Within that sub-sector, retail trade growth slowed from +1.1% to -0.5% (3m/3m), accommodation services slowed from 3.4% to 1.8% and food and beverage services growth declined from +2.3% to +1.4%. This certainly appears to provide some further clues of the impact of the UK consumer squeeze that is beginning to take place.

The squeeze on consumption is of particular note when one considers that today’s numbers showed real household disposable income falling by 0.4% in Q4 2016, the biggest decline since Q1 2014. Note that one consideration when looking at the extent of the consumer squeeze ahead is the interaction that household saving behaviour plays when households are faced with a higher cost base. The latest figures show that the household saving ratio fell to 3.3% in Q4 from 5.3% in Q3, the lowest level since records began in 1963. In light of this one might then question the extent to which households have the capacity to find further space to maintain existing spending momentum.

Note that there also remains an open question over the extent to which the weaker pound provides a sufficient boost to net trade to offset much of the consumer driven drag. Our view remains that there will be a visible slowdown into 2017, though we note that in terms of the hard numbers, deceleration is visible only in the quarterly GDP growth pace. We see growth edging down to +0.5% q/q (with downside risks, given today’s services data) in Q1, 0.3% q/q in Q2 and Q3 and 0.4% in Q4. Because the quarterly growth pace accelerated through last year, that has a favourable effect on the level of GDP across 2017 such that our year overall growth forecast is for 2.0% for this year, up from 1.8% last.

Note that current account figures for the final quarter of 2016 were published alongside today’s National Accounts providing the good news that one might expect after such a sharp fall in sterling after the Brexit vote. Here we saw the current account deficit fall from 5.3% to 2.4% of GDP, its lowest in the red reading since the second quarter of 2011 and as a share of GDP that is the biggest quarterly current account upswing on record. The detail of the report highlights a £10bn improvement in the trade balance (albeit perhaps also enhances by erratic gold flow estimates). However there was also a more than £3bn improvement in net investment income.