UK economy grows by 0.5% in first quarter

27 April 2011

The UK's first quarter GDP data came in as expected on Wednesday, showing a rebound from the previous quarter's shock contraction.
In its first estimate the Office for National Statistics (ONS) said GDP increased by 0.5% quarter-on-quarter, with the yearly figure putting in a rise of 1.8%.
Following the release the pound rose 0.51% against the dollar to 1.6565 and 0.18% on the euro at 1.1275.
A decrease of 0.5% in fourth quarter GDP figure for 2010 has been put down to the effect of "abnormal weather conditions" by the ONS. GDP is now estimated to have returned to the level it was in the third quarter of last year.

Howard Archer, chief European and UK economist at IHS Global Insight, said: "On the face of it, this is a pretty disappointing performance, which points to the economy being stagnant overall during the past two quarters. This fuels concern over the underlying strength of the economy and its ability to withstand the fiscal squeeze.
"One crumb of comfort is that the underlying performance looks a little stronger than indicated by the headline GDP figure. GDP growth in the first quarter was pulled down by a plunge in contstruction output and a sharp drop in utilities output. These sectors can be very volatile and it is notable that service sector activity saw a reasonable bounce back in the first quarter and manufacturing output held up well," he added.
Total services output increased by 0.9% in the first quarter, compared to a decrease of 0.6% in the final quarter of 2010, with the largest contribution coming from the business and finance sector, which saw output up 1% compared to a 0.8% decline in the previous quarter.
Meanwhile, construction output decreased even faster in the first three months of the year, by 4.7% after a 2.3% decrease in the final months of 2010.
Interest rate rise unlikely
The release came as a further blow to hopes for an interest rate rise, with experts now virtually ruling out a raise at May's Monetary Policy Committee meeting.
Azad Zangana, European economist at Schroders, said: "As the Bank of England had been forecasting a 0.8% rise in growth for the first quarter, the growth numbers today should act as the final nail in the coffin for a May increase in interest rates.
"In our view most of the risks to the UK economy stem from external factors now, such as the continuing rise in oil prices and the European debt crisis. We expect the balance between growth and inflation to improve in the second half of the year, which will eventually prompt the Bank of England to raise interest rates – probably in August."
The figure is also lower than the 0.8% increase forecast by the Office for Budget Responsibility, but Vicky Redwood, senior UK economist at Capital Economics, said markets appear to be relieved the number was not even weaker.
"With consumers clearly retrenching, we doubt growth will pick up much speed during the rest of the year – indeed our forecast of just 1.5% growth in 2011 as a whole now looks pretty testing. The chances of an interest rate rise next month just got even slimmer," she added.

This article was written for Interactive Investor

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