UK economy staring at 'prolonged moderation'

While the UK labour market remains firm, first official GDP estimates suggest the slowdown in UK's economic growth has extended into the second quarter, according to Moody's.

In its 'Brexit Monitor' research note to clients, the ratings agency said business activity surveys are in line with 5-year averages and pre-referendum levels, but GDP estimates suggest growth has slowed. In the second quarter, the economy expanded at a moderate pace of 0.3% over the quarter.

Growth in the service sector remained significantly below levels seen in the months after the referendum, and production and construction activity fell from the first quarter.

Housing market indicators are trending below 5-year averages and have fallen since the referendum. Private construction activity weakened over recent months and expectations suggest house prices will continue to stagnate over the short-term.

Moody's continues to believe - in its base case scenario - that the credit impact of Brexit will be 'modest and manageable', but cautioned that there are clear and significant downside risks if the UK and EU do not reach a Brexit deal.

Colin Ellis, managing director at Moody's, said: "Alongside weaker GDP growth in 2017, a broader array of indicators point to a prolonged moderation in consumption, despite the UK labour market remaining firm thus far.

"Given higher inflation following sterling's decline, surveys suggest that households are increasingly pessimistic about the future, with a weaker housing market and tighter credit availability acting as additional headwinds."

However, investment sentiment is near 5-year averages and has further improved in recent months driven by the manufacturing sector.

"This suggests that the pick-up in actual business investment growth in the first quarter may be sustained. Most recent employment data for May highlights a gradual increase in labour market growth while employment intentions in the manufacturing sector picked-up, however less so in services," Moody's concluded.