A British Union Flag, also know as a Union Jack (Photographer: Jason Alden/Bloomberg)

Consumers' Brexit Squeeze Puts Economy on Lower Growth Track

(Bloomberg) -- The U.K. economy posted its worst performance in a year as the dominant services industry felt the impact of an intensifying Brexit-related squeeze on living standards.

In addition to faster inflation, households are also now facing a period of uncertainty as Britain prepares for a general election and the start of two years of negotiations to leave the European Union. The slump in growth to 0.3 percent in the first quarter could be the start of a slower phase for the economy, with Bloomberg’s monthly survey projecting that expansion won’t pick up for the rest of this year.

Consumers' Brexit Squeeze Puts Economy on Lower Growth Track

The data comes six weeks before the June 8 general election called by Prime Minister Theresa May, who’s hoping to capitalize on her commanding lead in polls to increase her Parliament majority and strengthen her hand in the coming Brexit talks. Growth since the referendum in June has largely outperformed expectations, until recently.

“The cracks in the U.K. economy are starting to show,” said Scott Corfe, director of the Centre for Economics and Business Research. “Theresa May has timed the election well from an economics perspective. There is a high chance of things getting worse from here.”

The pound, which has been largely buffeted by political developments since the Brexit vote, stayed higher after the GDP data and was up 0.3 percent to $1.2943 as of 12:36 p.m. London time.

The first-quarter growth was less than half the pace recorded at the end of 2016, according to the Office for National Statistics data. Services, which account for more than three quarters of the economy, expanded the least in two years.

That downturn was driven by consumer-focused industries such as retailers, hotels and restaurants, which fell 0.5 percent. Industrial production rose 0.3 percent, with buoyant exports helping manufacturers increase output by 0.5 percent. Construction rose just 0.2 percent.

Consumers' Brexit Squeeze Puts Economy on Lower Growth Track

Having made Britain the strongest-growing Group of Seven economy bar Germany last year, consumers are now cutting back in response to rising prices brought on in part by the depreciation of the pound since the Brexit vote. And the pressure is expected to intensify; inflation is pulling ahead of earnings and a record-low saving ratio means people have little room to maintain their spending by setting aside less.

Bloomberg’s monthly survey projects growth of 0.3 percent in the three months through June and 0.2 percent in the next two quarters. The question for Labour leader Jeremy Corbyn and other opposition parties is whether they can take advantage of the signs of economic weakness to help them eat into May’s poll lead before the election.

“The economy hasn’t been a major theme yet,” said Andrew Goodwin, an economist at Oxford Economics in London. “There will be an incentive for Labour to bring this up, but whether they’re successful in moving the narrative on to the economy is another matter. Certainly there’s a clear incentive to do so.”

The GDP report is based on only 44 percent of the information that will ultimately be available. Estimates for March suggest the economy lost momentum at the end of the quarter, with industrial production falling 0.7 percent and services stagnating.

“It is increasingly likely that the slowdown in the first quarter is the start of a sustained period of more sluggish growth,” said Suren Thiru, head of economics at the British Chambers of Commerce. “Inflation is expected to continue to rise, increasing the squeeze on consumer spending power and firm’s profit margins.”