Interest rate rise ‘less likely’ after growth downgrade gives Philip Hammond headache

JOnathan Prynn
New figures: Chancellor Philip Hammond will make his Spring Statement on the UK's economy next month: EPA

Britain’s “slow lane” economy grew even more weakly than first thought at the end of last year as rising prices squeezed family budgets.

The official estimate of GDP growth in the last three months of 2017 was downgraded from 0.5 to 0.4 per cent, dragging down the full year rate from 1.8 to 1.7 per cent.

The surprise downgrade dismayed the financial market and the pound fell 0.75 of a cent against the dollar to $1.3892 in early trading as investors bet it was now less likely that the Bank of England will order an interest rate rise in the spring.

It is also a gloomy backdrop for Philip Hammond’s Spring Statement on economic prospects next month and means Britain’s GDP growth was lagging well behind the EU average of 0.6 at the end of last year and was the second slowest in the G7 group of major economies behind Italy and Japan.

Government statisticians said growth in household spending dropped to just 1.8 per cent last year, the slowest annual rate since 2012 and a big fall from the 3.1 per cent rise in 2016.

Consumer spending has slowed dramatically since the Brexit referendum in June 2016, which sent the pound diving and export prices soaring.

Darren Morgan, head of GDP at the Office for National Statistics, said: “Services continued to drive growth at the end of 2017, but with a number of consumer-facing industries slowing as price rises led to household budgets being squeezed.”

He added: “A number of very small revisions to mining, energy generation and services were enough to see a slight downward revision to quarterly growth overall, despite headline services output being unchanged.”

John Hawksworth, chief economist at PwC, said: “The big picture has not changed. The UK economy is still estimated to have slowed markedly in the first half of 2017 as higher inflation —linked primarily to the weaker pound after the Brexit vote — dampened real household spending power.

“This factor continued to dampen consumer spending growth in the second half of 2017, but was offset by a stronger world economy, which boosted UK exports in areas like manufacturing and financial and business services. Government spending also provided some support as the Chancellor eased off on austerity, particularly as regards public investment.”

He warned growth was likely to stay slow in 2018 at about 1.5 per cent.

Jacob Deppe, head of trading at online broker Infinox, said: “This confirms Britain’s economy ended 2017 with a whimper rather than a bang.

“To make matters worse, it’s becoming clear the slowing momentum at the tail end of last year has dragged into the start of 2018. January’s weak retail sales figures, and factory orders falling to a four-month low, all point towards continued weakness in the UK economy.”