Economic Slowdown Responds to Inflationary Pressure in the UK

Much like predicting the weather or picking stocks, economic analysts study a group of variables and make educated guesses about which way the economy will turn. And since there are many ways to measure progress and economic success, individual data can be interpreted in multiple ways. Recent UK figures show weak economic performance. And the decline is more pronounced than most economists predicted. Is Brexit to blame for the sharp slowdown?

Inflation and Consumer Confidence

Inflation has steadily risen since last year’s Brexit vote. The economic data for the first three months of 2017 reflect the impact of inflationary prices, as the spending pinch catches-up with consumers. Viewed alongside reduced house prices and drops in consumer confidence, the economic slowdown is both a symptom and a phenomenon, as Britons prepare vote in June.

According to the Office of National Statistics, overall economic growth slowed to a one year low during the first three months of the year, showing a meager 0.3 percent gain. The number contrasts the 0.7 percent growth seen in the closing months of 2016, and falls far below last year’s overall growth rate of 1.8 percent. In fact, many observers predicted a far more immediate economic response to the Brexit vote, believing recession would take hold in the months trailing the vote. Instead, economic growth was on par with that seen in Germany, among last year’s best performers. Many are taking recently released Q1 2017 figures as an undeniable sign the Brexit vote has come home to roost.

Responding to the data, the British finance minister highlighted he resiliency of the UK economy, while Labour opposition played-up the threat to living standards. At the same time, some leading economists predict a further slowdown, expecting growth to drop to at least 0.2 percent throughout the year.

At the time of the Brexit vote, price inflation stood at .5 percent. It has since grown to 2.3 percent and many informed observers believe it could exceed 3 percent before the end of the year or during the first quarter of 2018. Rising oil and commodities prices are thought to be reducing UK consumers’ disposable income. Retail segments and hotels are suffering as a result. In fact, the Office of National Statistics last week indicated retail performance had logged its largest quarterly drop since 2010.

What Does the Slowdown Mean for Britons?

Consumer attitudes buoyed the British economy in 2016, as UK shoppers continued to spend money – even as personal savings levels dwindled to low levels. The unsustainable support appears to be falling away as Britons now have less disposable income to return to the economy. The vulnerable position is less than ideal for both the UK economy as a whole, and for individuals facing reduced spending power.

Borrowing to deflect cash flow deficits is a slippery slope for credit-challenged families, but an inflationary squeeze can send even bad-credit borrowers to the lending marketplace. If you find yourself short on funds, comparing finance terms online ensures the best borrowing outcomes – provided you are prepared for timely repayment. Good-credit house shoppers, on the other hand, may find a silver lining in the latest round of economic news, as house prices have dropped for the second consecutive month.

Though the economy seems to have lost momentum after a prolonged run of consumer spending, there are some positive takeaways from recent analysis. Despite modest dips in house prices, the housing market remains stable – albeit short of affordable inventory. And low unemployment prevails, as business activity continues to rise at a modest pace.

The impact of the Brexit vote is undeniable, but the UK continues to avoid the recession many saw coming. Supported by a strong global economy, UK trends have outperformed forecasts on some crucial measures. Stock markets, for instance, remain at near-record highs. But the strongest evidence of a slowdown has come to light this week, giving analysts another batch of data to consider. As the June vote nears, a key question will be whether or not the British economy can prosper without the strong consumer spending push, seen last year.

Paul graduated in 2001 with a degree in Finance. Since then he has gone on to work for several of the UK's most well-known financial institutions.

An avid blogger and a huge football fan, Paul is here to guide you through the ins and outs of personal finance and perhaps save you some money in the process!

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