Tags: UK Economy Makes Feeble Recovery in First Quarter

UK Economy Makes Feeble Recovery in First Quarter

Wednesday, 27 Apr 2011 10:54 AM

Britain's economy recovered only modestly at the start of the year, hindered by a sharp drop in construction and making it likely that the Bank of England will keep interest rates at record lows for some months.

Gross domestic product expanded by 0.5 percent between January and March, in line with forecasts, after contracting by the same amount in the final three months of 2010.

That means Britain's economy has barely grown since September and is lagging other leading economies.

"Underlying activity in the economy remains pretty much stagnant," said Vicky Redwood, Capital Economics.

"The 0.5 percent quarterly rise in output means that the economy did nothing more than reverse Q4's snow-related dip."

The recovery in the first quarter is weaker than either the Bank of England or Office for Budget Responsibility had penciled in earlier this year and is likely to fuel opposition criticism of the government's austerity measures, many of which have yet to kick in.

But markets had already been bracing for a weak reading and sterling rallied as investors drew a sigh of relief that key sectors of the economy, such as manufacturing and services grew at a healthy pace. Services grew by 0.9 percent on the quarter and manufacturing by 1.1 percent.

"The latest snapshot of the UK economy suggests that the government's austerity measures are beginning to take their toll, yet they have not derailed the recovery all together," said Azad Zangana, European Economist at Schroders.

"However, as the Bank of England had been forecasting a 0.8 percent 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."

Construction was the biggest drag, falling by 4.7 percent on the quarter and posting its worst performance since the first quarter of 2009 when Britain was deep in recession.

The Office for National Statistics said the rebound was little more than an arithmetic effect following the Q4 contraction and the underlying growth picture was broadly flat.

Overall, the recovery appears too weak to convince the majority of Bank of England policymakers to raise interest rates, despite inflation running at twice the central bank's 2 percent target.

Money markets show investors see only a 50 percent chance of a rate hike by August and are overall pricing in only one quarter-point rate hike by the end of the year.

The government welcomed the economy's return to growth and said the recovery was always going to be choppy.

© 2017 Thomson/Reuters. All rights reserved.

   
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Britain's economy recovered only modestly at the start of the year, hindered by a sharp drop in construction and making it likely that the Bank of England will keep interest rates at record lows for some months. Gross domestic product expanded by 0.5 percent between...
UK Economy Makes Feeble Recovery in First Quarter
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2011-54-27
Wednesday, 27 Apr 2011 10:54 AM
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