Weakening retail sales as inflation raises price of imports allied with lower industrial output point to the UK economy ‘dropping down a gear’

Worries that the UK economy is losing steam have been strengthened by news of a housing market slowdown, a drop in industrial output and the weakest performance for a year by the construction industry.

Economists on Friday said there was growing evidence that the UK economy slipped down a gear as it entered the new year, following a strong finish to 2016 that had confounded the doomsayers predicting a post-Brexit-vote slump.

Now, 10 months on from the vote to leave the EU, economic indicators point to strains on companies from higher costs as the pound’s slump makes imported materials and fuels more expensive. Consumers, the main driving force of UK economic growth, are also under pressure from rising inflation, with signs they are becoming less willing to spend in shops, restaurants and bars.

The latest official figures for February painted a picture of economic growth easing after the robust 0.7% expansion in the final three months of 2016. The Office for National Statistics said: “Today’s data show that overall UK economic activity was relatively subdued in February, following strong growth across the headline industries at the end of 2016.”

The National Institute of Economic and Social Research said growth probably slipped to 0.5% in the first quarter, based on its its analysis of the latest official figures.



“A key component of this moderation has been relatively weak retail sales in the first two months of this year. Consumption is expected to moderate further this year as increasing inflation erodes households’ purchasing power,” said James Warren, research fellow at the thinktank.

As a result, the Bank of England would likely ignore rising price pressures from the weak pound in favour of shoring up growth and be in no hurry to raise interest rates from their all-time low of 0.25%, he added.

ONS (@ONS) Economic activity was relatively subdued in Feb, following strong growth across key industries at the end of 2016 https://t.co/quM5OtzuBO

The ONS figures will disappoint commentators who hoped a boost to exports from the weak pound would offset the slowdown in consumer spending as households grapple with the double whammy of rising prices and sluggish pay growth.

The Bank’s governor, Mark Carney, said on Friday there were signs that strong consumer demand was “coming off slowly”. “That’s what we expect but we’ll monitor it and ensure that we chart the right path,” he added at an event in London.

The pound is down about 17% against the dollar and 11% against the euro since the referendum, making UK goods and services significantly cheaper to overseas buyers. A pound was worth just under $1.24 on Friday as the downbeat economic figures prompted investors to downgrade the UK’s prospects.

There has been some evidence of a boost to exports from the weaker pound but the latest trade figures showed Britain’s deficit for goods and services trade widened in February as exports fell and imports rose.

The deficit on goods alone widened to £12.5bn from £12bn in January and was significantly deeper than the £10.9bn forecast in a Reuters poll of economists. The ONS cautioned, however, that the widening was mainly down to an increase in imports of erratic goods, a category that includes big items such as ships and aircraft and those with irregular trading patterns such as precious stones and gold.

Its figures for industrial production showed output fell by 0.7% in February as warmer weather knocked household energy demand. That drop defied economists’ forecasts of a 0.2% rise. Within the industrial sector, manufacturing output dipped 0.1%, also missing forecasts for a 0.3% rise.

Jack Coy at the Centre for Economics and Business Research consultancy said there was still a good chance manufacturing could help shore up the wider economy this year. “Boosted by increased competitiveness from the weaker pound, manufacturers are enjoying bright prospects and strong order books. Furthermore, the exchange rate effect is likely to be magnified by strong demand in key export markets,” he said.

Figures for the construction sector showed that output fell 1.7% in February on the back of weaker infrastructure work and housebuilding. It was the biggest drop for almost a year and worse than forecasts for output to hold steady. The ONS said monthly construction figures were prone to swings and it noted three-month on three-month figures showed output continued to rise.

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There were also fresh signs of a housing market slowdown as Halifax, Britain’s biggest mortgage lender, reported house prices were rising at their slowest annual pace for almost four years. They were up 3.8% in the three months to March compared with a year earlier.

“It’s now incontrovertible that the housing market has slowed sharply this year, indicating that the monetary policy committee’s interest rate cut in August provided only a temporary stimulus to demand,” said Samuel Tombs at the consultancy Pantheon Macroeconomics.