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Economic growth could be hit by Brexit warns George Osborne

Published 27/04/2016

Bank of England Governor Mark Carney
Bank of England Governor Mark Carney

Britain's economic growth could be hit by Brexit, Chancellor George Osborne has again warned, after figures showed that the UK economy slowed in the first quarter of this year following a slump in the manufacturing and construction industries.

The Office for National Statistics (ONS) said gross domestic product (GDP) grew by 0.4% in the first three months of 2016, down from 0.6% in the fourth quarter of last year.

Mr Osborne said: "It's good news that Britain continues to grow, but there are warnings today that the threat of leaving the EU is weighing on our economy. Investments and building are being delayed, and another group of international experts, the OECD, confirms British families would be worse off if we leave the EU.

"Let's not put the strong economy we're building at risk, and vote to Remain on June 23."

Earlier on Wednesday, the head of the Organisation for Economic Co-operation and Development (OECD) said leaving the EU would be the equivalent of imposing a "tax" of one month's income on UK workers.

The downward impact on UK growth was driven in part by a poor performance from the manufacturing industry, which fell by 0.4% in the first three months of the year compared with a 0.1% rise in the quarter before. Overall production was down 0.4% between January and March.

The construction industry also dropped back in the first quarter, falling 0.9% compared with an increase of 0.3% in the fourth quarter.

But Britain's dominant services sector, which accounts for more than 78% of the UK economy, made strong ground, lifting 0.6% in the first quarter.

It came as the index for services showed that output increased by 0.1% between January and February this year, the same level of growth as between December and January after the ONS revised down its figure by 0.1 percentage points.

ONS chief economist Joe Grice said its initial estimate for first quarter GDP showed the UK economy had slowed down.

He added: "Today's figures suggest growth has slowed as compared with the pace up to to the middle of last year.

"Services continue to underpin the economy but other sectors have shown falling output this quarter."

Mounting gloom over the global economy, Britain's forthcoming referendum on Europe and market volatility have dealt a blow to business confidence in recent months.

It has left the Bank of England in no hurry to raise interest rates from 0.5%, where they have remained since March 2009.

Bank governor Mark Carney warned last week that uncertainty around the EU referendum was beginning to hamper UK economic growth.

He told the House of Lords Economic Affairs Committee that the risk posed by the EU referendum had "the potential to reinforce existing vulnerabilities in relation to financial stability", which include the UK's high current account deficit, the property market and market liquidity.

He said: "Some elements of these risks may be beginning to manifest."

Mr Carney also reaffirmed concerns raised by the Bank's Monetary Policy Committee earlier this month, stating that there was "some softening in growth during the first half of 2016" due to uncertainty surrounding Britain's vote on the EU.

It came after the International Monetary Fund (IMF) downgraded its forecast for the UK economy over fears of disruption if Britain leaves the EU on June 23.

The IMF scaled back its projection for UK economic growth for 2016 by 0.3 percentage points to 1.9% - marginally below the 2% forecast of the Government's Office for Budget Responsibility - but held its forecast for 2017 at 2.2%.

A series of industry surveys covering the manufacturing, construction and services sectors had already pointed to a slowdown in GDP in the first quarter of this year.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said: " Concerns about Brexit likely played a role in the Q1 slowdown and they probably will take a greater toll on GDP growth in Q2.

"But the downward trend in GDP growth since 2014 suggests that the EU referendum cannot be blamed for all of the economy's ills.

"The fiscal squeeze has tightened this year after a pre-election pause, while the boost to growth in household spending from falling saving and rapid employment growth has run its course."

Senior economist at Hargreaves Lansdown, Ben Brettell, said it is likely first quarter GDP will be revised in the coming months.

"It's important to remember this is only the first estimate of GDP, and doesn't include factors like investment and trade, which would be most likely to be hit by referendum-related uncertainty. Indeed the preliminary estimate of GDP is based on less than half of the data which will ultimately be available.

He added: " The bigger picture is that growth remains lacklustre, but reasonably resilient. Low energy and fuel prices should continue to aid the domestic consumer, but neither wage growth nor inflation look anywhere near strong enough for the Bank of England to consider higher interest rates, especially given the added uncertainty provided by June's referendum."

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