U.K. Economy Posts Lackluster Growth

By Wiktor Szary and Jason Douglas Features Dow Jones Newswires

U.K. economic growth remained subdued in the second quarter, as a modest revival in consumer spending offset shrinking industrial production, a sign that a hoped-for shift toward export-led growth remains elusive.

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Economists say that businesses--particularly exporters--will need to take the baton from consumers squeezed by rising prices if the U.K. economy is to avoid stuttering just as Britain's exit talks with the European Union get under way.

Quarterly growth stood at 0.3% in the April-June period, the U.K.'s Office for National Statistics said Wednesday, a slight improvement on the 0.2% growth rate of the preceding quarter, but still less than half the pace of growth at the end of last year.

Proponents of Brexit have suggested that the pound's steep depreciation in the wake of last year's referendum could boost overseas demand for British products, strengthening the manufacturing industry and decreasing the economy's reliance on domestic demand. But so far, the economy has showed little sign of that shift.

The expansion was driven largely by an improvement in consumer-facing services, which rebounded on stronger retail sales, a tentative sign that British shoppers could be returning to stores after sharply paring down spending in the first quarter.

Growth was also supported by a strong performance from the film industry, which has benefited from tax breaks introduced in 2014, as well as Britons' appetite for blockbusters such as "Pirates of the Caribbean: Dead Men Tell No Tales" and "Wonder Woman."

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On an annualized basis, growth accelerated to 1.2%, from 0.9% in the previous three-month period, the ONS said.

The second-quarter expansion was in line with the expectations of economists polled by The Wall Street Journal. The data cover the first three months of the two-year Brexit negotiation period. The U.K. served its exit notice to Brussels on March 29, and negotiations began in earnest last month.

"The weak performance in the industrial sector suggests that the economy is not rebalancing towards net trade and investment, which [Bank of England Governor] Mark Carney wants to see before raising interest rates, " said Samuel Tombs, chief U.K. economist at Pantheon Macro, a consultancy.

The sharp fall in the pound since last-year's Brexit vote propelled annual inflation to a near-four-year high in May, triggering a slowdown in consumer spending and inspiring hawkish signals from certain BOE policymakers.

Price growth slowed unexpectedly in June, but remained well above the BOE's inflation target, and above the pace of growth in wages. Economists and policy makers expect inflation to accelerate a little further over coming months.

Sluggish growth in the U.K. economy contrasts with a robust expansion in the eurozone, a reversal of the trend in 2016. The 19-nation currency area expanded at the fastest rate in two years in the first three months of the year, outpacing the U.K. and the U.S.

Business surveys and industrial production data suggest the expansion continued in the second quarter. Figures for April and May showed output at eurozone factories, mines and utilities grew strongly in the second quarter even as their British counterparts stumbled.

The International Monetary Fund on Tuesday downgraded its growth forecast for the U.K. this year. The fund said it expects the economy to expand just 1.7%, compared with a previous estimate of 2.0%, reflecting first-quarter weakness.

Economists said the lackluster pace of growth will probably persuade BOE officials to keep their benchmark interest rate on hold when they announce their August policy decision next week.

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

(END) Dow Jones Newswires

July 26, 2017 09:16 ET (13:16 GMT)