Downing Street disappointed over weakest economic growth in five years
A Number 10 spokesman insisted that the fundamentals of the economy remain ‘strong’.
The British economy grew at its slowest pace in five years in the first quarter, prompting disappointment from Downing Street and raising doubt over a Bank of England interest rate hike next month.
The Office for National Statistics (ONS) said gross domestic product (GDP) grew by 0.1% in its initial estimate for January to March.
It was the weakest quarterly growth since the fourth quarter of 2012 and worse than economist predictions for a slowdown to 0.3%.
That compares with 0.4% in the final quarter of 2017.
Downing Street said the GDP figures were “clearly disappointing”, but insisted that the fundamentals of the economy remain “strong”.
Asked if uncertainty surrounding Brexit had contributed towards the near-standstill in growth, the Number 10 spokesman said: “Our economy has remained resilient.
“Growth was stronger than many expected after the referendum. What the Government has been working towards has been providing certainty for business.
“The agreement on the implementation period was an important step providing certainty for businesses.”
While many thought the so-called Beast from the East would have hit Britain’s economy hardest, official figures showed that recent snowfalls had a relatively small effect on growth.
ONS spokesman Rob Kent-Smith said: “Our initial estimate shows the UK economy growing at its slowest pace in more than five years, with weaker manufacturing growth, subdued consumer-facing industries and construction output falling significantly.
“While the snow had some impact on the economy, particularly in construction and some areas of retail, its overall effect was limited, with the bad weather actually boosting energy supplies and online sales.”
The worse-than-expected growth figures dampen prospects of an interest rate hike beyond 0.5% by the Bank of England’s Monetary Policy Committee on May 10.
Ben Brettell, senior economist at Hargreaves Lansdown, said: “As recently as last week markets were pricing in a near-90% chance that the Bank of England would raise rates next month, but this fell to more like 50% after comments from Mark Carney suggested potential ‘softer’ economic data and continued uncertainty over Brexit meant policymakers weren’t wedded to a May hike.”
Rate-setters will also have to consider recent easing in inflation rates, with the Consumer Price Index (CPI) having dropped back from 2.7% to 2.5% in March – marking a one-year low and bringing it closer to the Bank’s 2% target.
“Today the market’s saying there’s just a 25% chance that rates will move in May,” Mr Brettell said.
The pound tanked in the wake of the release as traders “hastily” revise their interest rate expectations.
Sterling tumbled as much as 1.1% versus the greenback to 1.375 – its lowest level in nearly two months, and dropped 0.9% against the eurozone currency to 1.138.
ONS figures showed that construction was the biggest drag on GDP – dropping 3.3% over the first three months of the year – which was its most dramatic fall since the second quarter of 2012.
Manufacturing growth slowed to 0.2%, though that was partially offset by a rise in energy production due to colder weather.
The UK’s powerhouse services sector – which accounts for around 79% of the economy – was the biggest supporter of GDP growth in the first quarter, having increased by 0.3% thanks in part to business services and finance.
#BOE expected Q1 #UK #GDP #growth to be 0.3% q/q in minutes of March #MPC meeting. Saw "measurable" snow impact but underlying expansion same as in Q4 2017 (when economy grew 0.4% q/q). So actual Q1 expansion of just 0.1% q/q is certainly food for thought for MPC at May meeting https://t.co/j3YDludpdZ— Howard Archer (@HowardArcherUK) April 27, 2018
However, the ONS noted that longer term trends point to weakening growth in the services sector.
It comes amid a squeeze on consumer finances from higher inflation, triggered by the Brexit-induced collapse in the pound, and slow wage growth.
Labour’s shadow chancellor John McDonnell claimed the GDP figures “further confirm that continued Tory austerity cuts are weakening growth”.
He said: “It’s clear to everyone except Philip Hammond that our economy is in need of increased investment and working families are struggling with the cost of living and the burden of increasing household debt.”