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Weakest economic growth in five years casts doubt over Bank of England rate rise

Preliminary estimates show gross domestic product (GDP) grew by 0.1% in the first quarter.

The British economy grew at its slowest pace in five years in the first quarter, raising further 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%.

It compares to 0.4% in the final quarter of 2017.

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UK economic growth (GDP)

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.”

It dampens prospects of an interest rate hike by the Monetary Policy Committee on May 10.

Experts had widely expected rates to rise above 0.5% with another rise having been factored in for November.

Ben Brettell, senior economist at Hargreaves Lansdown, said: “The news casts further doubt over a May interest rate rise.

“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) of inflation 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.

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“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 0.9% versus the greenback to 1.378 – its lowest level in nearly two months, and dropped 0.6% against the euro zone currency to 1.141.

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.

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

James Smith, a developed markets economist at ING, said consumer caution played a “big part” in the first quarter growth figures.

“Evidence from the consumer sector suggests that it was one of the worst quarters for retailers since the crisis.

“It’s also worth remembering that industrial production, which grew by 0.7% in the first quarter, will have been flattered by the recovery in oil output following the pipeline outage back in December. Without that, the economy may not have grown at all.

Downing Street said the GDP figures were “clearly disappointing”, but insisted that the fundamentals of the economy remain “strong”.

A spokesman pointed to ONS findings that bad weather and weaker manufacturing growth and construction output had played a part in holding GDP back.

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.”

He added: “As the Chancellor said in the Spring Statement, it is important we continue with our balanced approach, getting our debt down and supporting our public services, while keeping our taxes low and building a Britain fit for the future.”

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