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UK economic growth: Brexit or bad weather? The real reasons behind collapse to 6-year low

Ben Chu
Economics Editor
Friday 27 April 2018 12:29 BST

The Office for National Statistics reported on Friday that the UK’s GDP growth slumped in the first quarter of 2018 to just 0.1 per cent – the weakest quarterly growth rate in almost six years.

Some have blamed the weather. Others blame Brexit.

But what are the real reasons for the decline? And can we expect this weakness to continue?

Is it due to the weather?

The UK experienced some awful weather in late February and March as a Siberian cold front known as the Beast from the East struck.

Philip Hammond, explicitly mentioned the UK’s “exceptional weather” in his response to the poor GDP figures.

Yet the ONS itself has sought to downplay the economic impact of the snow.

Construction output slumped by 3.3 per cent in the quarter. Clearly some of this was due to disruption due to the weather, which forced the closure of many building sites. But the ONS noted that construction output fell in all three months of the quarter, not just snow-hit March.

Retail spending, which accounts for around 20 per cent of GDP, also fell in the quarter. Again, snow is clearly partly responsible for this: if people can’t physically get out they will find it harder to spend, whether at the shops or at petrol stations.

But the ONS said there was a “longer term trend” of weakening services growth in the UK.

It’s also important to note that bad weather also boosts demand in an economy, in the form of more spending on domestic heating, so some of the snow drag on growth will have been offset.

Is it due to Brexit then?

The UK economy performed better than most analysts expected in the immediate wake of the June 2016 Brexit vote. But it has slowed down since, certainly relative to the eurozone and the US, which have been booming.

Year-on-year rate, the UK’s growth is now just 1.2 per cent, well below the 2.9 per cent rates seen in the US and 2.7 per cent in the eurozone in the final quarter of 2017.

The most plausible explanation for that is that the UK experienced a spike in inflation last year due to the slump in sterling following the unexpected Brexit vote result. This eroded real incomes and crimped household spending, slowing the overall economy.

Investment by UK firms has also been weaker than elsewhere, probably due to specific concerns by firms here about post-Brexit trade arrangements.

However, while Brexit can explain the broader slowdown over the past year, it’s harder to invoke it as an explanation for the particular sharp fall in growth in the three months to March 2018.

It’s also notable that growth and economic activity in the eurozone also seems to have also slowed rapidly in the first three months of the year (although we don’t have the official GDP estimate yet) for reasons that are not well understood.

So what will happen next?

Opinions are split among UK private sector analysts. Some expect growth to bounce back as inflation recedes (due to the impact of the post-referendum sterling depreciation easing) and as nominal average wage growth continues to pick up.

Others are unconvinced that the “good old British consumer”, as the chancellor recently put it, will come to the rescue, pointing to soft UK consumer confidence surveys.

Official forecasters are also somewhat divided.

The Bank of England was relatively optimistic in February, estimating that growth this year will come in at a reasonably robust 1.8 per cent, driven by higher real wages and a pick-up in business investment on 2017.

But at the Spring Statement the Office for Budget Responsibility, the Treasury’s official forecaster, projected growth this year of just 1.5 per cent, dipping to 1.3 per cent in 2019.

Whatever is driving it, weaker official GDP data is certainly likely to shape policymakers’ decisions. Moves made in financial markets on Friday in the wake of the disappointing data suggest many traders now think the Bank is most unlikely to raise interest rates again in May – something they had until recently seen as a safe bet.

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