Second estimate of UK Q1 GDP unrevised at 0.4 pct q/q, growth to further slowdown in Q2

The second estimate of UK’s first quarter GDP growth was unrevised from the earlier estimate of 0.4% q/q, on par with consensus projections. The annual growth was slightly lowered to 2% y/y, the slowest growth since Q1 2013. The construction output and industrial production data after the release of first estimate of GDP was weak, but it did not provide much reason to anticipate a downward revision in the second estimate of GDP, said Lloyds Bank in a research report.

Hence, the main risk is centred on the services sector’s trend. The official services sector output data was released along with the GDP release. It contracted 0.1% m/m in March but with an upward revision of growth in January. This was enough to anticipate unrevised Q1 GDP growth overall.

The data released today shows whether the economic growth will further decelerate in the second quarter before rebounding in H2 2016. Even if business investment continues to be subdued, which further contracted 0.5% q/q in Q1 following a contraction of 2% in Q4 2015, the weakness continues to be focused on the oil and gas sector, noted Lloyds Bank. Furthermore, the economic growth continues to be weighed on by net trade, in spite of robust activity in the first quarter in the euro area, which is UK’s main trading partner.

But, domestic demand continues to be underpinned by consumer expenditure in spite of these drags. Domestic demand grew 0.7% q/q, following a 0.6% growth in Q4 2015. A strong retail sales growth in April implies continued momentum, added Lloyds Bank. If the headwind from increased uncertainty is for a brief period of time, the absorption of the UK economy’s spare capacity might resume later in 2016. This will exert upward pressure on domestic costs in 2017, according to Lloyds Bank.