What's going on?
The UK economy barely grew in the first quarter of the year, according to data released on Thursday, as the British consumer failed to stay calm and carry on!
What does this mean?
The initial estimate for growth in the first quarter was released three weeks ago and came in below economists’ expectations at the time. As is usual with this kind of data, as more information becomes available, the data changes. Economists expected Thursday’s report to show higher growth than the first estimate, but instead it said growth was actually less than previously thought: the UK economy grew 0.2% in the first quarter. If that growth rate is sustained over the rest of this year, it will be the worst year for economic growth in Britain in more than five years.
Why should I care?
For you personally: This is kind of your fault…
Well, sort of. When Britain voted to leave the European Union, the British pound fell sharply. That has pushed up the cost of imported goods which, in turn, has pushed up overall prices in the economy (a.k.a. inflation). At the same time, your pay isn’t increasing any faster. The result is a squeeze: British consumers have less disposable income which, naturally, leads to a decline in spending. Since consumer spending makes up two thirds of the UK economy, a spending pullback has a pretty damaging effect.
For markets: Expect continued low interest rates from the Bank of England (BoE).
In the months that followed the Brexit vote, the BoE decreased its target interest rate which, effectively, made it cheaper for people and businesses to borrow, and thus spend, money. With economic growth lagging, the BoE is less likely to raise its target interest rate anytime soon – which probably means borrowing costs will stay low for some time.