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Weaker construction and manufacturing set to slow GDP growth

Published 25/10/2015

During the third quarter Britain's construction sector shrank at its sharpest rate for almost three years
During the third quarter Britain's construction sector shrank at its sharpest rate for almost three years

Growth figures published on Tuesday are set to show the economy easing back, due to weaker construction and manufacturing output.

Gross domestic product (GDP) is expected to have increased by 0.6% in the third quarter, falling back from strong 0.7% growth in the previous period.

Growth in the second quarter bounced back from a rate of 0.4% at the start of the year, which was the weakest pace since the end of 2013.

GDP expectations for the year were recently marked down by the independent Office for Budget Responsibility from 2.5% to 2.4% - following growth of 3% in 2014 - after the unexpectedly slow start to the year.

During the third quarter Britain's construction sector shrank at its sharpest rate for almost three years in August, according to official data.

The Office for National Statistics added that although the country's manufacturing output rose in August, it was down by 0.8% year-on-year.

The UK's trade deficit narrowed to £11.1 billion in August compared with £12.2 billion in July.

But economists had expected a smaller shortfall of £9.6 billion, which reflects the impact of a weak eurozone and a strong pound on UK exporters.

Economists at Investec said: "Our baseline case is that the UK economy is passing through a slightly soft patch, thanks to the 10.5% rise in sterling - on a trade weighted basis - over the past two years."

Earlier this month the International Monetary Fund warned that the risks of a global financial crash had increased as the slowdown in China and potential US rate rises threaten the stability of debt-laden emerging economies.

Howard Archer, chief UK and European economist at IHS Global Insight, said: "We expect slower GDP growth in the third quarter to have been held back by contraction in construction output and only modest industrial production growth."

Economists agree that the strength of the UK's powerhouse service sector will decide whether third quarter GDP falls below 0.6%.

Mr Archer said weaker purchasing activity in the service sector for three months in a row points towards overall GDP coming in at 0.5% in the third quarter.

ING chief international economist Rob Carnell also forecasts GDP will slip to 0.5% in the latest quarter, adding that growth will be held back due to uncertain global trading and weaker business surveys.

However, IHS expects a rebound in the final quarter of the year, which would be helped by a pick up of growth in the eurozone.

The European Central Bank president Mario Draghi said in the last few days it will consider increasing its monetary stimulus at its next meeting in December from the current 1.1 trillion euro (£805 billion), hoping to spur growth in the region.

In the UK, employment levels and wages continue to rise, fuelling consumer spending.

Mr Archer said: "We expect the fundamentals to continue to be largely positive for consumer spending, enabling it to be a key growth driver.

"We expect consumers to spend at a healthy clip in the fourth quarter of this year given current very healthy purchasing power."

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