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GDP growth slower than expected

Published 28/04/2015

A welder at work as growth figures published this week look set to show that the UK's economic expansion slowed down at the start of this year.
A welder at work as growth figures published this week look set to show that the UK's economic expansion slowed down at the start of this year.

Britain experienced a sharp slowdown at the start of the year as growth slipped to a worse-than-expected 0.3%, official figures showed today.

The pace of gross domestic product (GDP) growth in the first quarter was half the 0.6% rate seen in the final quarter of 2014, a pre-election setback for Coalition parties.

It was the weakest quarterly growth since the end of 2012. The data comes just nine days before the General Election as politicians vie to demonstrate their competence in running the economy.

The preliminary estimate published by the Office for National Statistics (ONS) showed the dominant services sector grew at its slowest pace in almost two years.

Meanwhile, the construction sector shrank for the second quarter in a row - the first time this has happened since 2012.

Industrial production also shrank slightly, squeezed by a decline in North Sea output amid lower oil and gas prices, though within production manufacturing edged up.

ONS chief economist Joe Grice said: "The economy expanded a little more slowly in the first quarter of 2015 than we've seen in the past two years and that's largely due to the services sector, where growth has eased to 0.5%.

"In addition, there has been a further fall in construction output that itself takes around 0.1% off the GDP growth rate. But, as always, we warn against reading too much into one quarter's figures."

Chancellor George Osborne wrote on Twitter: "GDP up 0.3%, 2.4% on year. Good news economy continues to grow but this is a critical moment & reminder you can't take recovery for granted.

"GDP figures show future of the economy is on the ballot paper. We should stick to the plan that's delivering a brighter more secure future.

"With rising instability abroad, now is worst possible time to vote for instability at home."

Prime Minister David Cameron tweeted: "GDP figures show our economy is still growing, but we can't take the recovery for granted. Don't risk it with Ed Miliband and the SNP."

The disappointing GDP figure is likely to cement expectations that interest rates will not rise until next year, amid zero inflation.

It comes after the economy grew by 2.8% in 2014, its fastest pace since 2006 and the strongest rate among G7 advanced economies.

Today's ONS figures showed the main factor in the slowdown of the key services sector was business services and finance, which edged up only slightly after a strong end to 2014.

The construction sector shrank by 1.6% in the first quarter after a 2.2% fall in the previous three months.

Industrial production shrank by 0.1% but within this manufacturing was up by 0.1%.

The 2008/9 recession saw GDP shrink by 6% but it is now 4% above its pre-downturn level at the start of 2008.

However not all parts of the economy have recovered, with services 8.5% ahead but production still 10.4% behind where it was seven years ago - and, within this, manufacturing down 4.8%.

The construction sector is 8.5% off its level at the start of 2008.

GDP has grown by 8.4% since the second quarter of 2010 when the Coalition came to power.

Economists had forecast the figures to show a slowdown in the pace of quarterly growth but the 0.3% figure was below the consensus of 0.5%.

However there are also expectations that growth will pick up later this year, helped by low inflation boosting consumer spending.

Vicky Redwood, chief UK economist at Capital Economics, said: "With the election just days away, the news that the UK's economic recovery slowed sharply in the first quarter clearly won't help the Coalition parties, but this slowdown should just be temporary.

"The preliminary estimate of a 0.3% quarterly rise in GDP in Q1 was weaker than the consensus forecast of a 0.5% rise (and even our forecast of a 0.4% increase).

"Nonetheless, we doubt that the recovery is on the cusp of a sustained slowdown. Households' real incomes are still on track for their strongest growth this year since 2006."

Separate business surveys were also upbeat and suggested growth returning to 0.7% or 0.8% soon, she added, while the first quarter figures could be revised up "although obviously not in time to help the incumbent government".

"We still think that the economy will grow by close to 3% this year as a whole."

Howard Archer, of IHS Global Insight ,said the slowdown was "particularly unwelcome" for the Tories and Liberal Democrats "hoping that many undecided voters will ultimately decide to vote for them due to their management of the economy".

"Despite the marked slowdown in the first quarter, we remain largely upbeat about growth prospects for 2015.

"Nevertheless, the marked first-quarter slowdown will necessitate our cutting our 2015 GDP growth forecast to 2.4% from 2.6%."

Chris Williamson, chief economist at Markit, said: "The UK's impressive run of solid economic growth stuttered at the start of the year.

"Although most likely overstating recent economic weakness, the slowdown highlights major concerns that linger over the health of the UK economy and will inevitably result in economic forecasts being revised down."

Despite continued growth, a falling deficit and rising employment, there were "valid reasons to remain concerned about the longer-term outlook", he said.

Worries included meagre wage growth, lack of business investment, weak productivity, the threat of an inconclusive General Election, and external risks such as the fallout from a Greek debt default.

TUC general secretary Frances O'Grady said: "The slowest recovery in modern history just slowed down again.

"This is bad news for jobs and living standards. What's more, Conservative plans for extreme cuts after the election risk completely killing off this faltering recovery and plunging the economy back into even deeper trouble.

"The makers are marching backwards, construction is slumping and it's only services that have rescued the economy from shrinking. This is the opposite of the rebalanced economy we were promised.

"We were never going to get a stable recovery with the shaky foundation of wage stagnation, low investment and insecure jobs.

"We need a new plan for growth based on investment in infrastructure and good jobs with decent pay."

Shadow chancellor Ed Balls said: "While the Tories have spent months patting themselves on the back these figures show they have not fixed the economy for working families.

"Tory economic policy may be helping a few at the top but for most people bills have gone up faster than wages, which are down £1,600 a year since 2010. And now these disappointing figures show economic growth slowing down too."

CBI director general John Cridland said: "Growth slowed but checking the temperature with our members and surveys hints that the economy is more resilient than these figures might suggest.

"Prospects for this year remain bright, with lower oil prices and inflation continuing to support growth, despite challenges for the North Sea industry.

"But a strengthening pound means manufacturers are fighting a loss of competitiveness in the euro area, threatening to knock our exports performance."

Ben Brettell, senior economist at Hargreaves Lansdown stockbrokers, said: "The magnitude of today's slowdown comes as something of a surprise.

"Stewardship of the economy is a key battleground in the upcoming election. Overall the UK economy is about 4% bigger than its 2008 peak and has expanded 8.4% since the Conservative-led coalition took charge in 2010.

"However, today's bigger-than-expected drop is sure to be seized upon by opposition parties as evidence the UK recovery is faltering.

"While today's data is undoubtedly disappointing, it doesn't represent cause for undue pessimism. This is a first estimate, produced by the ONS using less than half of the data which will eventually be available."

John Hawksworth, chief economist at PwC, said: "We think this is a wobble rather than the start of a serious slowdown."

He said it would be "premature to conclude that the UK economic recovery is stalling when other fundamentals such as rising employment and low inflation are boosting consumer spending power".

"It may be that both consumers and businesses are being somewhat cautious about spending at present in the face of uncertainties around the election, the situation in Greece and how long oil prices will remain low, but we would expect some pick-up in UK growth in the second half of the year."

Later Mr Cameron said the economy was "growing at a rate that many other European countries would give their eye teeth for".

"These are one quarter's figures, they are less exciting than the previous quarter's figures that were higher, they show the economy is growing but they remind us, a timely reminder, that you cannot take recovery for granted."

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