UK’s economy returns to ‘modest growth’

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.

Today’s figure is a preliminary estimate and subject to revision.

Economists previously warned that growth of less than 1% in the first quarter would be disappointing and the lacklustre performance will raise serious concerns over the economy’s ability to withstand the coalition Government’s deficit-busting austerity measures.

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.

The soft figure comes as the country starts to feel the bite of Chancellor George Osborne’s fiscal squeeze.

Mr Osborne, who insisted yesterday the “economy was on the right track”, is rolling out an £81 billion package of spending cuts, which includes hundreds of thousands of public sector job losses, and the VAT hike to 20% from 17.5%.

The Government has pinned its hopes on the private sector picking up the slack in the economy - but today’s figures show certain sectors continued to struggle in the first three months of the year.

The Treasury remained defiant. A spokesman from the Government department said: “It is good news that the economy has returned to growth. Manufacturing is growing strongly, the economy has created thousands of jobs since the turn of the year, and borrowing is down.

“The Government has always expected the recovery to be choppy. But together with continued reminders around the world of the risks facing countries that do not deal with their debts and deficits, today’s data shows that the Government has set the right economic course.”

Industrial production, which includes manufacturing, mining and utilities, grew by 0.4%, compared with a 0.8% increase in the previous quarter.

Within this category, manufacturing maintained growth of 1.1%, but mining and utilities dropped 0.4% and 3.5% respectively.

The biggest decline came from the construction sector, which decreased 4.7% in the quarter, compared with a 2.3% decrease in the previous quarter.

The powerhouse services sector - which makes up some 75.8% of the total economy - grew by 0.9%, compared to a decline of 0.6% in the previous quarter.

Within this category, business services and finance, up 1%, and transport, storage and communication, up 2.7%, made the largest contribution to growth.

The majority of the Bank of England’s Monetary Policy Committee (MPC), who voted in favour of holding interest rates at historic lows of 0.5% earlier this month, were waiting for today’s figures to get a clearer picture of how the economy has fared so far in 2011.

The Bank is struggling with weak growth and surging inflation, which at 4% is still double the Government’s target.

The mediocre performance in the first quarter makes a rate rise next month, which had been mooted by some economists, more unlikely. City analysts are now expecting an increase in either August or possibly November.

Business Secretary Vince Cable said that today’s 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”.

The Business Secretary said that the Government’s double-headed approach of cutting the deficit and rebalancing the economy was “clearly visible in the statistics that we have”.

Howard Archer, chief UK economist at IHS Global Insight, said the latest figures were “pretty disappointing”.

He added: “The GDP data not only look to have killed off any prospect for an interest rate rise in May, but also significantly increase the likelihood that the Bank of England will hold fire for several months to come.

“In fact, we are putting back our expectation for the first interest rate hike from August to November.

ING economist Rob Carnell said that while the figures provided some support for the Government’s argument that the pace of fiscal consolidation will not derail the economy, they do not provide the Bank of England with enough of an excuse to respond to high headline inflation with tighter monetary policy.

“A May rate hike still seems a tough proposition at this stage,” he added.

The Bank of England’s next decision on interest rates is due on May 5, with its latest quarterly economic forecasts due a week later.