U.K. Economy Slows Sharply Ahead of Election, Brexit Talks -- Update

By Jason Douglas and Wiktor Szary Features Dow Jones Newswires

The U.K. economy slowed sharply in the first quarter as consumers pared back spending, a warning sign on growth ahead of a national election in June and the start of Britain's exit talks with the European Union.

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The British economy expanded at a quarterly rate of 0.3% in the first quarter of 2017, the U.K.'s Office for National Statistics said Friday, less than half the speed of the 0.7% expansion recorded in the final three months of last year. It was the weakest quarterly expansion since the first quarter of 2016, and fell short of the 0.4% expected by economists polled by The Wall Street Journal.

On an annualized basis, growth slowed to 1.2% from 2.7%, the ONS said.

The slowdown was driven by softness in services, especially retail, and disappointingly slow growth in manufacturing, which had been benefiting from an accelerating world economy and a weakened pound.

The data highlight how British consumers, whose resilience in the months after June's Brexit vote powered the economy in 2016, have been reining in spending as a bout of inflation stoked by a battered currency squeezes household budgets.

The slackening in growth comes ahead of a U.K. national election June 8 and as British and European officials prepare for talks over Britain's EU withdrawal. EU leaders meet Saturday to hammer out their negotiating priorities for a divorce process expected to last two years.

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Opinion polls point to victory in the election for Prime Minister Theresa May, whose governing Conservatives look set to return to power with an increased majority in the British parliament. Even with signs the economy is flagging, Mrs. May enjoys healthy approval ratings and faces a fragmented opposition led by the Labour Party and its unpopular leader Jeremy Corbyn, a veteran left-winger.

The slowdown, though, may add to pressure on British officials negotiating the country's EU exit, analysts say. The U.K.'s economic strength, compared with its European peers, had been one of Mrs. May's strongest cards in maintaining public support for Brexit and advocating a swift and clean break from the bloc.

Friday's data "will be used by the other side in the bargaining table to highlight the negative implications that Brexit brings," said Simon Kirby, head of macroeconomic modeling and forecasting at the National Institute of Economic and Social Research, a nonpartisan economic think tank in London.

The preliminary estimate of first-quarter growth--which is frequently revised as officials collect more data--showed output in the services sector grew just 0.3% on the quarter, while manufacturing expanded 0.5% and construction output grew 0.2%.

British consumers have seen their spending power eroded by feeble wage growth and rising inflation. A sharp fall in the pound since June's Brexit vote propelled annual inflation to 2.3% in March and the Bank of England expects it to head further above its 2% target this year.

Economists say that businesses--especially exporters--will need to take the baton from hard-pressed consumers if the U.K. is to avoid being eclipsed by its European peers just as Brexit talks get under way. Separate data Friday showed the Spanish economy grew 0.8% in the first quarter, though growth in France slowed to 0.3%.

Some business surveys in Britain have reported rising investment intentions and improving export orders, tentative evidence that businesses may be taking up some of the slack.

Mandy Ridyard, financial director of Produmax Ltd., a maker of aerospace components based in Baildon in northern England, said her firm has been plowing extra profits from buoyant exports into new production capacity.

"Brexit has emboldened us to knock on more doors," she said.

Write to Jason Douglas at jason.douglas@wsj.com and Wiktor Szary at Wiktor.Szary@wsj.com

(END) Dow Jones Newswires

April 28, 2017 05:15 ET (09:15 GMT)