UK economic growth likely to remain subdued in Q2, inflation to slowdown in April as airfares fall

The official data and the survey imply that the UK economy has decelerated since the start of 2016. The first estimate of Q1 GDP growth came in at 0.4% q/q, as compared with a 0.6% q/q growth recorded in the fourth quarter of 2015. The official estimate of March’s construction output and industrial output do not imply an expected upward revision to the initial data, said Lloyds Bank in a research report.

Moreover, the business activity surveys declined noticeably in April. It appears that the output growth in the second quarter is also expected to be weak as higher economic uncertainty starts to impact growth seriously. In April, the UK economy’s services, construction and manufacturing PMI came in to three-year lows. The weak PMIs show a natural slowdown of momentum. But the recent report suggests that the economy is expected to grow 0.3% q/q in the second quarter, added Lloyds Bank.

Meanwhile, the UK core and headline inflation accelerated in March. The headline CPI came in at 0.5% y/y, the most rapid rise since December 2014, whereas the core data, stripping energy, food, tobacco and alcohol, accelerated to 1.5% y/y in March.

The rise in inflation largely indicates a major increase in airfares due to early Easter holidays. However, the strong airfares offset the downside pressures from consumer fuel costs. UK’s headline inflation is likely to decelerate to 0.4% in April as airfares decline, according to Lloyds Bank.

“We continue to anticipate that a moderate recovery in domestic cost pressures, especially via faster pay growth from 2016 H2, will underpin headline inflation’s continued crawl back towards the 2% target”, added Lloyds Bank.