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Weak growth figures hit economic recovery hopes

Published 23/12/2015

Chancellor George Osborne
Chancellor George Osborne

Britain's economic recovery has been running out of steam as shock revisions to official figures showed growth was weaker than previously thought for much of 2015.

The Office for National Statistics (ONS) revealed that growth was 0.4% in the three months to the end of September, down from the initial estimate of 0.5%.

Growth was also revised down to 0.5% for the quarter to the end of June, from the 0.7% previously recorded.

It comes as the latest blow to the economy after dire public finances figures on Tuesday revealed worse-than-expected borrowing in November, up by £1.3 billion year-on-year to £14.2 billion.

The growth revisions were also unexpected, with most economists forecasting growth readings to remain unchanged.

Britain's economy has now expanded for 11 quarters in a row, but the latest revisions mean expansion in 2015 has been muted, with the year starting with a slowdown to 0.4% in the first quarter, edging up to 0.5% in the second quarter and then dropping back to 0.4% in the third.

It means there is little pressure on the Bank of England to raise interest rates from the rock-bottom low of 0.5%, despite its US counterpart raising rates in America last week for the first time in nearly a decade.

The Bank has previously said it expects growth to edge higher to 0.6% in the final three months of 2015, but the latest revisions mean expansion for the whole of 2015 is likely to have slowed to around 2.2% from nearly 3% in 2014.

Kallum Pickering, s enior UK economist at Berenberg, said the revisions have left the economy ending the year "on a very sour note".

"These changes significantly alter the quarterly growth story for 2015. Rather than a weak first quarter, a strong second quarter and an OK third quarter, disappointingly, data now show that the economy has been growing below trend all year," he added.

But the Treasury insisted the UK's economic performance remained "strong".

A spokesman said: "The UK was the fastest growing economy in the G7 last year, we're leading the pack with the US this year, we have a record high employment rate and the deficit is down.

"Today's figures highlight that risks remain - that's why we should continue working through our plan to build an economy that delivers security for working people."

Growth on an annual basis was also revised down in the third quarter, to 2.1% from the 2.3% previous reading.

The ONS data showed that growth was hit by a weaker performance from the dominant services sector, which accounts for around three-quarters of gross domestic product (GDP).

Services output grew by 0.6% in the third quarter, against 0.7% initially estimated, according to the ONS.

This came as manufacturing output shrank by 0.4% and construction contracted by 1.9%.

Net trade was also a drag on Britain's economy, knocking a percentage point off growth in the third quarter.

The revised figures mean the UK economy has grown by 6.1% above its pre-crisis peak, compared with an earlier estimate of 6.4% .

Data also out from the ONS showed that household disposable income rose by 0.5% quarter-on-quarter in the three months to the end of September, but Britons are saving less.

The share of disposable income saved by households fell once more during the third quarter - to 4.4%, down from 4.9% in the previous three months.

This reinforces data showing buoyant consumer spending in the UK, but also suggests Britons may be vulnerable to interest rate rises, with little put by in savings to cushion the blow.

The Centre for Economic and Business Research (Cebr) said the growth data "adds fuel to the existing concerns that economic growth is overly reliant on household consumption".

Howard Archer, chief UK and European economist at IHS Global Insight, said he still believes growth will pick up to 0.6% in the fourth quarter, but the revisions mean overall expansion in 2015 will be limited to 2.2%.

He added: " Downwardly revised GDP growth of 0.4% quarter-on-quarter in the third quarter will likely increase expectations that the Bank of England will not be raising interest rates until well into 2016."

There was some welcome economic cheer elsewhere as third quarter figures out separately from the ONS showed a better-than-expected current account deficit - a measure of the UK's trade gap between imports and exports.

The deficit stood at £17.5 billion in the third quarter, unchanged from the previous three months and lower than expectations for it to have surged to £21.50 billion.

Britain's current account deficit equates to 3.7% of GDP.

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