Belfast Telegraph

GDP rises but outlook still gloomy

New figures show sluggish recovery despite signs of a lift in the opening quarter

By Clare Weir

The UK economy returned to modest growth in the first three months of 2011, official figures have revealed, following a shock decline at the end of last year.

Gross Domestic Product (GDP) - a broad measure for the total economy - grew by 0.5% in the first quarter of the year, following an unexpected drop of 0.5% in the final weather-hit quarter of 2010, the Office for National Statistics (ONS) said.

But the ONS warned that underlying growth - that is, assuming there was no displacement of activity from the fourth quarter into the first quarter - was broadly flat.

Northern Bank chief economist Angela McGowan said that even with the expected catch-up activity after the bad weather at the end of fourth quarter in 2010, the UK has failed to impress in the first quarter of this year.

"However, it is important to note that the economy has not actually gone into reverse and, while there are significant challenges ahead, there are also opportunities for growth," she said.

"Austerity measures, low household confidence and high inflation will continue to place downward pressure on economic activity, but the global recovery continues and should help to support UK growth going forward.

"In addition, unemployment levels, although edging upwards, have done so extremely slowly and, compared to many other advanced economies, the UK has lost fewer jobs.

"Manufacturing continues to provide support to overall output levels and reinforces the need for a diverse portfolio when it comes to the national economy.

"The picture in Northern Ireland is broadly similar - we face the same austerity and inflation pressures, but our manufacturing base continues to tap into the global recovery and we have also seen some good investments recently in the local financial and business service sectors.

"However, we have some distance to go before high, sustainable growth levels are achieved."

The sluggish growth is likely to relieve pressure on policymakers at the Bank of England to raise interest rates in the face of soaring inflation.

Andrew Goodwin, senior economic advisor to the Ernst -amp; Young ITEM Club said that the construction figures look "frankly bizarre".

"These figures have to be classed as a disappointment - growth of just 0.5% in 2011 Q1 merely takes us back to the level we were at in 2010 Q3, which effectively means a six-month period of stagnation for the UK economy," he said.

"As with previous releases, the figures for the construction industry look frankly bizarre - given that the 2010 Q4 decline in construction output was heavily weather-related, the idea that it fell back by almost 5% in 2011 Q1 looks very odd and is completely at odds with the survey data.

"This sector alone subtracted 0.3 percentage points from Q1 growth, so we would suggest that the underlying strength of the recovery is probably a little firmer than the headline figure suggests.

"This is going to provide the doves on the MPC with more ammunition for their arguments in favour of keeping rates at 0.5%. With the potential for the Q2 figures to be adversely affected by the extra Bank Holiday, we could well be in for another weak outturn when that data is published in three months time, so there is little prospect of the Committee moving on rates any time soon."

Business Secretary Vince Cable said the figures showed welcome growth in manufacturing.

Mr Cable told the Commons Business Committee: "If you drill beneath the overall growth figures this morning, you will see that manufacturing growth is being sustained, which is exactly how it should be."

The committee's Labour chairman, Adrian Bailey, told Mr Cable that the 0.5% growth figure "looks pretty grim on the surface".