Inflationary impact on spending to hit Britain’s economic growth

THE British economy will grow at a sluggish pace this year, held back by lacklustre consumer spending crimped by an inflation rate that is well above the Bank of England’s target, a Reuters poll showed.

The poll of 27 economists, taken June 10-15, saw British gross domestic product (GDP) growing by 0.5% for all quarters until the third quarter of next year, following 0.4% in the current quarter.

The bulk of the government’s planned spending cuts, designed to rein in the budget deficit, are still in the pipeline. Inflation, which has stayed firmly above 4% this year, will serve as an added drag on consumer spending.

“GDP growth will be pretty lacklustre for the rest of this year, particularly household consumption, because inflation is completely eroding household income growth,” said Alan Clarke, economist at Scotia Capital.

“So in real terms, disposable income is really going down. In that environment, it is really hard for consumer spending to grow.”

The British economy contracted 0.6% in the final three months of last year before growing 0.5% in the first quarter of 2011, which essentially means it has stagnated over the last six months.

The consensus for growth this year held at 1.5%, but economists trimmed their full-year 2012 growth forecasts, cutting the median to 2.0% from 2.2 in the May poll.

Official data yesterday showing an unexpected surge in claimant count unemployment, along with news that wage growth is running at less than half the inflation rate, further underscore clear risks to consumer outlays.

There also has been increasing evidence that the British housing market, from which many Britons derive much of their feeling of material wealth, has taken another lurch down.

“Consumer spending accounts for over 60% of GDP so even a small slowdown or lack of pickup there is going to have a significant impact,” said Hetal Mehta, economist at Daiwa Capital Markets.

Compared with forecasts made a year ago for the current quarter, economists have almost tripled their inflation estimate to 4.5% from 1.7%.

Indeed, economists bumped up their projections for inflation for the 11th time in the last 14 polls and now see it averaging 4.4% this year compared with 4.2%. It is seen at 2.3% in 2012 compared with 2.2% in the May poll.

Of the 49 common contributors from a poll taken before the MPC’s latest meeting, eight now expect the BoE to hike rates later than their previous forecast of the third quarter this year.