By David Milliken and Andy Bruce
LONDON (Reuters) – Britain’s economy slowed sharply in the first three months of 2017 as households and high streets felt the pinch from higher inflation, which has risen sharply since last year’s Brexit vote.
With the country heading for an election on June 8, there were other signs on Friday of a slowdown as house prices fell for a second month and a measure of consumer confidence dipped.
The Office for National Statistics said growth in the overall economy weakened to a one-year low of 0.3 percent in the three months to March from 0.7 percent in late 2016.
That represented a bigger slowdown in the rate of quarterly gross domestic product growth than the drop to 0.4 percent economists had forecast in a Reuters poll.
Last year, Britain vied with Germany to be one of the fastest growing of the world’s major advanced economies with annual growth of 1.8 percent, defying widespread predictions of recession after the vote to leave the European Union.
But Friday’s figures are the clearest sign so far that the country is slowing after the Brexit vote and in the run-up to the early election called by Prime Minister Theresa May, who says she wants to strengthen her hand in exit talks as Britain prepares to leave the EU in 2019.
That said, weak retail data last week had caused some to expect a weaker number and the currency markets brushed off the new numbers ahead of a holiday weekend.
British finance minister Philip Hammond said the economy remained resilient, but the opposition Labour Party said the figures showed living standards were under threat.
Alan Clarke, an economist at Scotiabank, expects growth to slow further in the coming months to a quarterly rate of 0.2 percent as the squeeze from inflation intensifies.
“This weakness is likely to be blamed on Brexit. That is probably fair,” Clarke said.
Consumer price inflation stood at 0.5 percent at the time of the June 2016 Brexit vote, but since then it has risen to its highest in nearly four years at 2.3 percent, and many economists expect it to hit 3 percent later in 2017 or early next year.
Sterling fell by around 15 percent against major currencies after the Brexit vote and this — combined with higher global prices for oil and other commodities — is behind most of the rise in inflation, eating into households’ disposable income.
The ONS said the biggest drag to first-quarter growth came from retailers and hotels, which had been hurt by higher prices. Last week it said retail sales suffered their biggest quarterly fall since 2010.
Despite the pick-up in inflation, the Bank of England is widely expected to keep interest rates at their record low of 0.25 percent as it waits to see the full impact of Brexit on the country’s economy.
British growth last year relied heavily on consumer spending — to the extent that household saving fell to a record low — while the boost some exporters have felt from a weaker currency has yet to revive the economy as a whole.
Businesses ranging from coffee shops to carpet fitters have reported tougher trading conditions, though some cheaper clothing chains are doing well.
The ONS said GDP growth in year-on-year terms rose to 2.1 percent from 1.9 percent in the final three months of 2016, the strongest rate since the second quarter of 2015.
The BoE and the International Monetary Fund forecast growth of 2.0 percent this year before a modest slowdown in 2018. Most private-sector economists see weaker growth this year.
Britain’s dominant services sector grew 0.3 percent in the first quarter, the weakest rate in two years, after growth of 0.8 percent in late 2016, the ONS said. Industrial output also rose 0.3 percent while construction expanded by 0.2 percent.
(Editing by Jeremy Gaunt)