• Data boosts expectations rates will be left unchanged this year
• ONS confirms GDP only grew 0.5% in the first quarter
• But OECD says rates must rise if inflation is not to take hold
Household spending has slumped to its lowest rate in nearly two years, underlining the sluggishness of Britain's economy. The weakness in consumer spending even before the public spending cuts have fully kicked in will boost expectations that the Bank of England will not rush to raise interest rates in coming months, despite high inflation.
However, the OECD, one of the west's leading economic thinktanks, today called on the Bank of England to start raising interest rates this year to prevent inflation – currently at 4.5% – taking hold in the UK. In its twice-yearly report, the Paris-based OECD said Threadneedle Street would have to steadily increase borrowing costs over the next 18 months despite weak economic growth.
Revised figures from the Office for National Statistics confirmed that the UK economy grew by 0.5% in the first three months of the year, following a drop of the same magnitude in the fourth quarter of 2010. The two quarters taken together suggest the economy was stagnating rather than continuing its recovery from recession. Some economists had hoped for a slight upward revision to 0.6%.
Household spending shrank by 0.6% between January and March, the biggest quarterly drop since the second quarter of 2009 when the economy was mired in recession.
Hetal Mehta, UK economist at Daiwa Capital Markets, said: "Most shocking is perhaps the scale of the fall in consumer spending. Following the contraction in the fourth quarter, these figures underline the significant weakness in the consumer sector. And given the recent comments from the Bank of England that unexpected weakness in consumer demand would mean a slower pick up in interest rates than markets have priced in, we believe these figures reinforce our view that the majority of the monetary policy committee will continue to vote for no change in interest rates this year."
However, providing yet more evidence of rising price pressures, the GDP deflator climbed by 1.8%, its biggest increase since 1996 – exacerbating the dilemma for the Bank. Investment spending fell by 4.4%, leaving government spending as the only pillar that was growing, by 1%. But this is unlikely to continue given the chancellor's vast programme of spending cuts.
ING economist James Knightley said: "This reflected the fact that government departments were making sure they spent their budgets ahead of the end of the fiscal year. Now we are in the new fiscal year with lower budgets we will start to see this component dragging growth lower."
The only bright spot in Wednesday's GDP numbers was a 3.7% jump in exports, as British firms benefited from a weaker pound – while imports were down 2.3%, reflecting the weakness of the economy.
"The positive contribution from net trade has been a long time coming, but the fall in investment is a blow to hopes that this would be the other pillar of growth. Instead, surprisingly, government spending continued to support the economy – perhaps the last hurrah before the spending cuts kick in," said Mehta.
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Source: http://www.guardian.co.uk/business/2011/may/25/uk-household-spending-slumps-low
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