UK Growth Stalls in Conservative Challenge

UK growth slowed to its lowest rate since 2012 in a surprise reversal.

The British economy saw growth slow to just 0.3% in the first quarter of this year, a sharp reversal from the previous quarter when growth rose at a 0.5% rate. Analyst had varied expectations of growth nearly double the actual rate for Q1.

Consumers Fail to Show Up

UK growth slowed to its lowest rate since 2012 in a surprise reversal.

The British economy saw growth slow to just 0.3% in the first quarter of this year, a sharp reversal from the previous quarter when growth rose at a 0.5% rate. Analyst had varied expectations of growth nearly double the actual rate for Q1.

Consumers Fail to Show Up

In recent reports, economists at some investment banks had geared clients for extremely high growth expectations for the UK, with consumer spending an anticipated growth driver. While the EU has seen declining real purchasing power relative to exports with the falling value of the euro, the UK has fared better with a slightly more resilient pound. This currency tailwind, coupled with an export driven economic acceleration expected in the Eurozone, promoted rosy forecasts for the first quarter.

In reality, consumer spending failed to accelerate economic growth, in a trend that has sent a close parallel in the United States. In both English-speaking countries consumer spending has not risen despite falling energy costs, with consumers choosing to save the extra discretionary income from cheaper oil costs instead of spending the money on goods and services.

Services were the largest headwind to economic growth, rising just 0.5% in the first quarter–the lowest rate since 2013. Services have largely driven UK growth for a long time, and recent economic reforms in the country, particularly government austerity and tax cutting, were focused on increasing aggregate demand for services. These policies, though controversial amongst economists, have driven the Conservative party’s economic strategy, and showed some signs of success until this quarter.

In addition to weak service data, productivity fell 0.1% in the first quarter. Construction fell 1.6%, a surprising result as the UK government has aggressively worked on programs to increase the housing stock to combat a surge in housing prices that some analyst warn is reminiscent of the early 2000’s.

Chancellor of the Exchequer George Osbourne said the data indicates, “you can’t take recovery for granted” as the UK shifts into a critical moment in its recovery from the Global Financial Crisis of 2008.

Political Challenges

The slowdown in growth comes at a bad time for David Cameron, the Conservative Prime Minister for the UK. Cameron has spearheaded an aggressive economic policy against protestations of the Labor party, who has criticized the Conservatives for slashing social spending and contributing to income inequality.

Cameron has repeatedly responded that his efforts have driven growth in the country, saying recently at a political rally “with me you keep the jobs, you keep the growth, you keep the security.”

Labor has retorted that Conservative policies have done little for the UK’s middle class as the party struggles to regain power. Labor leader Ed Miliband recently argued that Labor could do a better job implementing policies that will benefit working families. “While the Tories have spent months patting themselves on the back these figures show they have not fixed the economy for working families,” said Labor economic spokesperson Ed Balls.

UK voters go to the polls next week.