UK economy likely to slow in Q1, headline inflation to reach 1% by end of 2016

UK’s final Q4 2015 GDP growth estimate was upwardly revised by 0.1pp to 0.6% q/q. Thus, the economic growth for the entire 2015 was also revised upwards by 0.1pp to 2.3%, still below 2014’s 2.8% growth. Domestic demand, particularly consumer spending, seemed to have mainly driven the economic growth, whereas net trade and business investment contributed negatively. The UK’s current account deficit for Q4 reached a record 7% of GDP from Q3’s 4.3%.

Meanwhile, recent economic activity indicators such as consumer and business surveys and industrial production imply that the UK’s economic growth might decelerate in the first quarter of 2016, according to Lloyds Bank. Increased uncertainty regarding outlook of global economic growth mainly led to the fall in sentiment. Even if the worries have subsided slightly, the effect is still expected to be negative, noted Lloyds Bank.

“We anticipate that growth will slow to 0.4% q/q in Q1 before edging up to 0.5% in Q2”, added Lloyds Bank.

Meanwhile, core and headline inflation in March both accelerated. Headline CPI accelerated 0.5% y/y, most rapid pace since December 2014. Core inflation, stripping food, energy, tobacco and alcohol, accelerated to 1.5% in March from 1.2% y/y in previous month. The rise is mostly due to the sharp increase in air fares because of early Easter holidays. Also, GBP’s recent decline might have impacted import costs.

“We expect another 0.5% headline print in April as the upward impulses from weaker sterling, positive energy price base effects and further Budget-linked duties are countered by an unwinding of the impact from airline charges and easing household energy bills”, said Lloyds Bank.

Moreover, a modest rebound in domestic cost pressures are expected to support push headline inflation upwards to 1% by late 2016, noted Lloyds Bank.