National accounts confirm little momentum in Q1 – EY ITEM Club comments

• GDP growth for Q1 was left unrevised at 0.1% in the Quarterly National Accounts. The EY ITEM Club expects an equally modest rise in output in Q2, with activity held back by the extra bank holiday and the impact of ongoing industrial action. Growth should then pick up in Q3, but the impact of a boost from lower energy prices will be counterbalanced by pressure from higher interest rates.
• Real household income fell back in Q1, after Q4's rise. Further weakness is likely in the near-term, given that universal energy support has now ended. Though the household saving ratio edged down in Q1, it remained well above pre-pandemic norms.  

Martin Beck, Chief Economic Advisor to the EY ITEM Club, says: “The Quarterly National Accounts saw GDP growth unrevised at 0.1% quarter-on-quarter for Q1. The expenditure breakdown saw growth boosted by a strong rise in business investment, as businesses took advantage of the final months of the super-deduction tax incentive. But there was little support from elsewhere in the domestic economy, with consumer spending flat and government consumption falling significantly. 

“The first cut of the income data for Q1 saw real household income fall 0.8% quarter-on-quarter, after growth of 1.3% in Q4 when consumers had started to receive universal energy support. With spending growth flat in Q1, this meant that the household saving ratio fell back to 8.7%. But given that the saving ratio averaged 7.2% in the decade prior to the pandemic, this suggests that the stock of ‘excess’ savings continues to grow.

“With universal energy help finished at the end of Q1, a support to spending power has been removed, so a further fall in real incomes looks likely, particularly when high inflation and rising debt servicing costs are factored in. But the outlook for household incomes enjoys some positives. Q2 should have seen a significant increase in benefit payments because of April’s large inflation uprating. And the EY ITEM Club’s expectation that inflation should still head down quickly in the second half of this year will reduce pressure from that source. But this faces off against a growing headwind from rising interest rates. 

“On balance, Q3 should see growth pick up. But beyond that, although the expansion will be supported by a boost from the fading of last year’s energy price headwinds, this will be counterbalanced by pressure from higher interest rates. The EY ITEM Club thinks the net result will be a slow economy, but not a recession.”