U.K. GDP growth likely to bounce back temporarily in Q2 by around 0.4 pct - Scotiabank

The U.K. economic growth outlook has weakened since the beginning of this year. Especially, the first quarter GDP growth came in much weaker than anticipated at just 0.2 percent quarter-on-quarter, while the forward looking indicators imply that growth is not expected to be any better in the rest of the year, noted Scotiabank in a research report.

The mechanism that resulted in the economic growth to decelerate sharply in the first quarter is intensifying, implying that the headwinds to growth would build as the year progresses. More specifically, inflation has risen sharply, while employment growth and wage inflation have decelerated.

This has resulted in real income growth to stall, down from 4 percent year-on-year a year ago to just above zero currently. This has led to abrupt slowdown in consumer spending growth, bearing down on overall GDP growth.

“While we expect a temporary, technical bounce in GDP growth during Q2 (by around 0.4 percent q/q), the second half of the year should see growth rates slow again to between 0.2 percent q/q and 0.3 percent q/q. The net result is likely to be full year growth of 1.6–1.7 percent y/y during 2017”, added Scotiabank.

But that is lower than the current central bank’s assumption of 1.8 percent to 1.9 percent year-on-year, which is based on quarterly growth rates of 0.4 percent quarter-on-quarter. According to the central bank, the net trade and business investment would give an offset to subdued household consumption. This is probable in both cases. Especially, subdued household consumption suggests slower import growth that would give stimulus to overall growth. Moreover, the weak GBP exchange rate and strong overseas demand should underpin exports.

“While there is some logic to expecting business investment to accelerate, we are more cautious given the degree of uncertainty surrounding the Brexit negotiations and the recent General Election campaign”, said Scotiabank.

At 23:00 GMT the FxWirePro's Hourly Strength Index of British Pound was neutral at 13.5955, while the FxWirePro's Hourly Strength Index of US Dollar was neutral at 2.95072. For more details on FxWirePro's Currency Strength Index, visit http://www.fxwirepro.com/currencyindex

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