Stronger GDP growth in Q2 set to be the calm before the storm - EY ITEM Club comments

30 June 2016

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  • GDP growth in Q1 left unrevised…
  • …while sizeable current account deficit should decline soon
  • Stronger Q2 is set to be the calm before the storm

Martin Beck, senior economic advisor to the EY ITEM Club, comments:

“Growth in Q1 was heavily reliant on the consumer, though there were some substantial revisions to the other expenditure components. Most notably the drag from net trade was much smaller.

“April’s output data provides a very strong launchpad for GDP growth in Q2, which is currently on course to be in the region of 0.5-0.6%. However, this is likely to be as good as it gets for a while. The ramifications of last week’s vote are already starting to feed through the economy and are likely to cause growth to slow in the second half 2016.

“The investment picture remains pretty bleak, with business investment still estimated to have fallen in both of the past two quarters. Given the heightened uncertainty in the lead up to the referendum, Q2 is likely to have seen a third successive decline in business investment. We would expect that downturn to deepen as we move into the second half of the year.

“Despite the smaller drag from net trade, the news on the current account was fairly depressing, with only a modest narrowing of the deficit from its record level of 7.2% of GDP in Q4 2015 to 6.9% in Q1 2016.

However, we would expect the current account deficit to narrow significantly from this point onwards, through a combination of the impact of the sizeable depreciation of the pound on exports and more subdued demand for imports.”

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