The reduction in the growth forecast – from 2 per cent to 1.9 per cent – came after a sharp slowdown in GDP in the first quarter of the year and after figures from the Office for National Statistics showed manufacturing output fell 0.6 per cent in March, while construction dipped 0.7 per cent as industrial output as a whole slumped 0.5 per cent.Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said, “March’s simply dreadful trade figures demonstrate that Britain is failing to capitalise on sterling’s depreciation. The trade deficit was the largest since September.

Industrial production continues to fall

“March’s industrial production figures show that the pressure on consumers’ real incomes from rising inflation is beginning to hurt manufacturers. Industrial production has fallen for three consecutive months.“With households’ real incomes set to come under further pressure from rising inflation, manufacturing output likely will grow only sluggishly ahead.”In a press conference, Mark Carney, governor of the Bank of England, agreed that, with inflation increasing and the pace of pay rises slowing, “wages won’t keep up with prices” this year. He added, “This is going to be a more challenging time for households.”He said that while Brexit was causing uncertainty among employers, weak wage growth was a long-running problem in Britain and was partly due to the country’s poor productivity record. However, Mr Carney said he was hopeful real wage growth would return in 2018.The bank’s Quarterly Inflation Report published estimated consumer price index (CPI) inflation this year at 2.7 per cent, 0.3 per cent higher than the previous forecast in February and well above the government’s 2 per cent target.

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No raise in interest rates

The report said that the rise was “entirely” due to the impact of weak sterling – now trading 12 per cent lower against the dollar than the pre-referendum level – and that raising interest rates would not be an effective way of tackling the current inflation.On the weakening economy, which saw GDP increase only 0.3 per cent in the first quarter of 2017 compared to 0.7 per cent in the last three months of 2016, the bank said, “The slowdown appears to be concentrated in consumer-facing sectors, partly reflecting the impact of sterling’s past depreciation on household income and spending.”It said consumer spending would be “slower in the near-term than previously anticipated” but forecast it would recover over the next two years.ING economist James Smith commented that, despite some hawkish sentiments from Mr Carney, he still did not expect an interest rate hike before Brexit talks conclude in 2019.“Unsurprisingly, there was no earth shattering changes to growth or inflation forecasts, with the possible exception of the 2017 (inflation) forecast. After all, the general election period is not an ideal time to make major alterations,” he said.“But the overall tone of the statement was fairly upbeat, and the MPC kept its reference to having limited tolerance to above-target inflation. Importantly, they also note that monetary policy ‘could need to be tightened by a somewhat greater extent’ than the path implied by markets.“That all sounds fairly hawkish, but we still aren’t convinced that the Bank will look to raise rates any time soon. We suspect that the MPC will continue to ‘look through’ the spike in CPI (inflation) and focus instead on the adverse effect it is having on consumers. The uncertainty surrounding the UK’s future relationship with Europe is still also likely to weigh on investment and hiring for the foreseeable future.“Interestingly, in slight contradiction to its other comments, the Bank does acknowledge that they must balance the trade-off between returning inflation to target quickly and supporting jobs/activity – and that this trade-off is present ‘through most of the forecast period’.“This suggests to us that there is still a divide in views between the hawkish external MPC voters, and the more cautious governor/deputy governors.”

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