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UK's economic slowdown confirmed

Published 28/05/2015

Growth was hampered by a dismal performance from overseas trade
Growth was hampered by a dismal performance from overseas trade

A slowdown in Britain's economic recovery at the start of the year was confirmed by official figures today, scotching hopes that growth data would be revised upwards.

Gross domestic product (GDP) increased by 0.3% in the first three months of 2015, half of its rate in the fourth quarter of last year, and the worst performance since the end of 2012.

The figures from the Office for National Statistics (ONS) showed that the powerhouse services sector, representing more than three-quarters of UK output, had a more sluggish three months than first estimated.

Growth was also hampered by a dismal performance from overseas trade, with the deficit widening from £9.6 billion at the end of 2014 to £13.2 billion in the first quarter.

The period saw a spike in imports as exports slowed.

Net trade acted as the biggest drag on the headline GDP figure since the third quarter of 2013.

Economists had hoped an earlier estimate of UK growth for the start of 2015 would be revised up to 0.4% after improved figures from the industrial production and construction sectors.

But data from the services sector - which has led the UK out of recession while other areas struggle - showed it grew by only 0.4% in the first quarter, its worst performance since the end of 2012.

ONS chief economist Joe Grice said: "Today's unchanged figure of 0.3% growth in GDP in the first quarter of 2015 reflects small upwards revisions to production and construction, offset by a downward revision to services.

"It confirms the picture of somewhat weaker growth in the first quarter than in recent ones. But no single quarter's figures should be given undue weight."

Household spending growth slowed down slightly to 0.5%, but has now posted increases for 15 consecutive quarters.

Business investment fought back from a contraction in the fourth quarter to grow by 1.7%, reaching £45.7 billion, its highest level since the second quarter of 2005.

But growth measured as GDP per head - a measure which irons out the effect of a rising population - was only 0.1% in the first quarter.

It had increased by 2.2% over 2014, but its year-on-year growth in the first quarter of 2015 was just 1.7%.

The UK's 2.8% overall GDP growth in 2014 had been the best among the G7's developed economies.

But the sluggish pace in the first quarter of this year has left the UK behind the troubled eurozone, which expanded by 0.4% in the period.

Earlier this month the Bank of England cut its forecasts for Britain's growth in 2015 sharply from 2.9% to 2.5%, as well as downgrading prospects for 2016 and 2017.

The Bank has said it expects first-quarter growth to be revised up eventually to 0.5%.

A Treasury spokesman said today: "It is clear that the foundations for a sustainable recovery are being laid.

"While it is good news that the economy continues to grow, the job is not done and we must go on working through the plan that's securing a better economic future."

Vicky Redwood, chief UK economist at Capital Economics, said the lack of any revision upwards to the GDP figure was "a touch disappointing" but this was still likely further ahead.

She said the drag from trade was "striking" and "hardly good news" for hopes to rebalance the economy away from a consumer-led recovery and towards industry.

Net trade knocked 0.9 percentage points off the quarterly rate of GDP, according to the ONS data.

But Ms Redwood added: "Looking ahead, we remain optimistic that Q1's slowdown was just temporary and that the recovery is probably already back on track again."

Economists broadly expect that low inflation - currently at minus 0.1% - will boost consumer spending power and support growth.

Howard Archer, chief UK and European economist at IHS Global Insight, said: "We remain largely upbeat about growth prospects for 2015 - especially now that the risk of prolonged political instability has been removed by the election of a majority Conservative government.

"We believe robust consumer spending could push GDP growth up to 0.7% quarter on quarter in the second quarter."

He added that uncertainty over an EU referendum could pose a risk down the track.

Confirmation of the sluggish expansion in the first quarter "will likely dent any lingering expectations that the Bank of England could hike interest rates later on this year", he said.

David Kern, chief economist at the British Chambers of Commerce said: "The unrevised GDP growth figure understates the true momentum in the economy.

"While we expected weaker growth at the start of 2015, this figure exaggerates the scale of the slowdown and is likely to be revised upwards."

PwC chief economist John Hawksworth said: "As the domestic recovery continues and the euro area economy gradually picks up, we would expect to see stronger UK GDP growth later this year, so the first quarter should be a temporary dip not the start of a more prolonged slowdown.

"This is important since real GDP per head is still around 1% below where it was at the start of the recession, so there is still some way to go before the average person will feel that the recovery from the crisis is complete."

TUC general secretary Frances O'Grady said: "With growth so weak, the Chancellor's plans to hit the economy with extreme cuts could plunge it into deeper trouble.

"The Government must think again because its economic plan is failing. The economy urgently needs a new plan for growth, based on the strong foundation of investment in infrastructure and good jobs with decent pay."

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