Economy stutters as wage squeeze sees consumers hold back

News that the economy grew less rapidly than previously thought during the first three months of the year comes as a disappointment.

The City's economists had largely been expecting the growth figure for the first quarter to remain unchanged at 0.3%.

That actual growth is now reckoned to have been a mere 0.2% - the weakest since the corresponding quarter last year - is not encouraging.

It represents an even starker slowdown from the 0.7% growth that was notched up during the final three months of last year.

That said, it should not be that much of a shock.

While all sectors in the economy showed growth, the main cause for the downgrade is that activity in the services sector - the biggest contributor to GDP - expanded less strongly than thought, with two of the main parts of the sector actually contracting.

These were distribution, hotels and restaurants and transport, storage and communications.

:: UK economy grew by just 0.2% in first quarter

Worryingly, the Office for National Statistics notes that this was the first negative quarter-on-quarter growth rate for distribution, hotels and restaurants since the final three months of 2012, while for transport, storage and communication, it was the first negative quarter of growth since the summer of 2013.

This confirms the message that has been coming from Britain's high streets during the last few months, which is that consumers have been drawing in their horns, probably in response to the fact that wages are, for the first time since the summer of 2014, failing to keep pace with inflation.

It is possible that the weakness in household spending may also have been exaggerated by the fact that Easter fell later this year than it did last year and that the impact of spending around Easter this year will show up in the current quarter's number.

Construction activity also remains anaemic; one of the main themes from the recent results from the UK's biggest commercial property companies, Land Securities (LSE: LAND.L - news) and British Land (LSE: BLND.L - news) , is that both have put speculative developments on hold while they wait to see how Brexit negotiations pan out.

So far, so predictable.

What will alarm ministers more is that net trade made a negative contribution to GDP growth during the quarter.

The devaluation in the pound against the US dollar and the euro since the UK's vote to leave the EU last June was supposed to have improved the balance of payments as Britain's exports became cheaper and more competitively priced on international markets.

Unfortunately, the pound has been rallying against the euro since mid-October and against the dollar since January, taking the edge off that competitiveness.

The export growth that the UK enjoyed at the end of last year appears to have come juddering to a halt.

During the quarter, according to the ONS, there was a rise in total imports, contributing negatively to UK GDP, particularly in transport equipment, machinery and chemicals.

The question now is what happens next.

The Bank of England and other forecasters have sought to strike an optimistic note, arguing that while inflation is likely to hit 3% at some point before the end of the year, that is likely to mark the peak and that inflation should start to moderate thereafter.

Meanwhile, with other parts of the world economy starting to enjoy better growth, most notably the eurozone, the UK's largest single trading partner, there will be hopes that the trade picture begins to improve.

Another cause for optimism is that business investment appears to have picked up so far this year and that it did not contract during the final three months of last year by as much as previously thought.

Since business investment is one of the main motors of growth, that is especially encouraging.

Businesses invested some £43.8bn during the first three months of the year - up 0.6% on the final three months of 2016.

But the overall picture created by these figures today is that the economy has slowed markedly from the final three months of last year.

The euphoria that some people felt following the vote to leave the EU last June has worn off and certainly the fillip to trade that the subsequent drop in the pound delivered has also faded away.

Instead, households are feeling more subdued, as earnings growth fails to keep up with the cost of living.

An upturn in net trade cannot be taken for granted while government spending remains constrained by the deficit.

Investment by businesses may be the only positive contribution to growth in coming months.