AXA IM Senior Economist, David Page: “Quarterly National Accounts reveal the scale of the consumer squeeze.”


AXA IM Senior Economist,  David Page: “Quarterly National Accounts reveal the scale of the consumer squeeze.”

  • Headline Q1 GDP growth remained at 0.2% q/q, but details highlight more fundamental weakness
  • Saving rate battered, falling to 1.7% record low, as wilting real employment income compounded by tax effect.
  • Business investment growth left unrevised at 0.6% q/q in Q1. The outlook here will be a key determinant for monetary policy this year.
  • April’s index of services rose 0.2%. This is consistent with our outlook for services growth of 0.5% in Q2 and broader GDP growth of 0.4%.
  • Q1 current account rose to £16.9bn (3.4% of GDP) from £12.1bn (2.4%). However, underlying dynamics look favourable for a narrowing over the coming quarters.
  • This will fuel further debate on the MPC. We believe the MPC will leave policy on hold in August, but November’s decision is likely to be more data dependant.
  • We expect weak household activity and Brexit-uncertainty constrained investment to see Bank Rate left on hold into 2019.  


The final release of UK Q1 GDP left the headline rate unchanged at 0.2% q/q as we and markets had expected. What was new to this release was a full estimate of the quarterly national accounts, which included income estimates. These revealed that while the UK consumer pared back spending growth to just 0.4% in Q1 2017 – the joint slowest quarterly pace since end-2014 – the underlying backdrop for consumers revealed even greater strain. Indeed, to support even this level of consumption, UK households reduced saving and the saving rate fell to a record low of 1.7% (from an already low 3.3%). The chart below illustrates how this decline in the saving rate far exceeds that suggested by our basic models and has fallen markedly below even the Bank of England’s (BoE) more aggressive expectations. Yet despite this sharp drop in saving, still household consumption growth was subdued.



Source: National Statistics, AXA IM as at 30th June 2017


This was driven by a sharp drop in total household income on the quarter (1% nominal), itself driven by rising tax payments. Much focus has rightly fallen on the impact that rising inflation would have on real income growth, focusing primarily on employment income. Real employment income was indeed under pressure rising by just 1.3% (year on year) – the weakest growth since Q3 2014 (precipitating the last time quarterly spending growth was lower). This weak annual pace of growth was made up of annual growth of 1.2% employment growth, 2.4% wage growth and 2.1% annual inflation (loosely, 1.2+2.4-2.1 ~ 1.3%). Real income growth is likely to fall further over the coming quarters as inflation rises and employment and wage growth have slowed.


However, post-tax income fell by 1% on the quarter and 2.7% on the year in nominal terms. In real terms, disposable incomes were 1.4% lower on the quarter and nearly 5% lower on the year. This in turn reflected the delayed impact of tax changes from the start of the financial year, including changes to dividend payments, as well as house price rises driving capital gains payments higher, increased self-employment tax returns and an effect surrounding bonus payment effects. While we do not expect a repeat of this effect in the coming quarters, the weakened level of household finances, as real employment income growth looks set to slow further, is likely to exacerbate the downside impact on consumer spending over the coming quarters (despite some rebound in retail sales likely in Q2).


Business investment growth was left unrevised in Q1 at 0.6% quarter on quarter. As recent comments by Governor Carney have highlighted, much hangs on the outlook for business investment. The Governor cited business investment as a possible compensator for the weakness in household spending growth. Data for Q1 is inconclusive: if this pace of business investment was maintained over the next three quarters of 2017, business investment would grow by just 1.2% - short of the BoE’s May projection of 1.75%. However, the latest BoE Agents surveys point to acceleration in business investment. At the same time, we believe that heightened uncertainty about the Brexit outlook is likely to dampen investment growth over the coming quarters. Estimates of Q2 business investment due on 24 August will be important for this debate.  


Also looking ahead, today also saw the first release of April’s index of services, which rose by 0.2% on the month. This is consistent with our preliminary estimate of service sector growth accelerating to 0.5% in Q2, something we expect to be underpinned by a rebound in the distribution sub-sector of services as retail sales rebound into Q2. In turn this underpins our expectation that GDP growth will be around 0.4% in Q2.


Finally details of the UK current account were released for Q1. The current account deficit widened to £16.9bn in Q1, from £12.1bn in Q4 (3.4% of GDP from 2.4%). This was exactly in line with market expectations. The widening almost entirely reflected a worsening trade deficit from last quarter’s six year low. Over the coming quarters we would continue to expect the trade deficit to narrow as a weaker UK consumer shrinks the UK’s import components and signs of stronger export growth emerge. Encouragingly, although net investment income from abroad shortfall rose to £2.7bn from £1bn, this remains around the lows of the last four years. More robust growth in the euro area and a subdued level of sterling suggest that this balance could narrow further over the coming quarters. The combination of these factors should narrow the current account deficit over the coming quarters.


Today’s release will add details for the Bank of England’s MPC as its Committee actively considers whether or not to tighten monetary policy as Governor Carney, Chief Economist Haldane and external member Forbes have openly mused in recent weeks. We consider Governor Carney’s comments last week (“now is not the right time”) and Haldane’s comments yesterday (“happy with where rates are for now”) as suggestive of caution in moving as soon as the August Inflation Report. This view is compounded by key data proving the strength or otherwise of the economy will not emerge until post-August’s meeting – including Q2 business investment. Whether the MPC tightens after this will depend on whether their relatively upbeat outlook for activity is borne out. If growth has managed 0.4% q/q over the coming quarters and looks set to accelerate to 0.5% in 2018, the MPC does appear ready to remove some of last August’s stimulus. However, our own outlook is for weaker growth. Today’s data confirms a household sector under severe strain. So much depends on how much of a dampening impact Brexit and political uncertainty have on business decisions over coming quarters. We continue to see GDP growth of just 1.7% this year and 1.2% next, leading the MPC to leave Bank Rate on hold through this year and next.





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