Initial estimates for Q1 GDP show the UK narrowly avoided an unprecedented triple-dip recession.
UK output expanded by 0.3% in the three months to March, having contracted by 0.3% in the previous three months. The reading was stronger than expected; according to the Bloomberg consensus, the City was expecting growth of just 0.1%……..
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Azad Zangana, European Economist
The news that the UK has avoided a triple-dip recession will come as a relief for the Chancellor George Osborne who is hosting a team of officials from the International Monetary Fund (IMF) this week as part of the UK’s Article IV review. The Q1 GDP figures will strengthen the Chancellor’s hand following the IMF’s recent call for the UK to change course on austerity.
In our view, the government has done well not to chase aggressive fiscal targets when it has missed them, but instead tried to maintain some momentum in the reforms of public services. Nevertheless, the government should be using near-historic low interest rates to undertake huge multi-decade infrastructure investment projects, which the UK desperately needs to unlock its future growth potential.
Within the details of the GDP report, growth in the service sector (0.47 percentage point contribution) was more than enough to offset the contraction in the construction sector (-0.17 percentage point contribution). The industrial production sector was broadly flat. From the preliminary estimate, it appears that the poor weather in January and March did have a negative impact on construction and manufacturing, but the weakness in those two sectors was offset by the service sector. However, it is worth noting that the Office for National Statistics barely has two of the three months of service sector data for this preliminary release. Given the poor weather that hit in March, there is a strong possibility that the overall GDP numbers are revised down when more data is available for the end of the quarter.
Overall, regardless of the political point-scoring that will follow, the figures confirm what we have known for some time. The UK economy is facing severe headwinds as the household sector, banking sector and government all try to deleverage at the same time. Meanwhile, the non-banking corporate sector – the only healthy part of the economy – has been shaken by the crisis in the eurozone. As a result, the economy is barely generating any growth at all.
Looking ahead, we expect the UK economy to pick up in the second half of the year on the back of stronger corporate investment. However, the key threat in the near term is the faltering eurozone economy – the UK’s biggest export destination. Political instability coupled with severe austerity is damaging confidence in the eurozone, and having a knock-on impact on UK exporters. We expect the Bank of England to respond with another £25-50 billion of quantitative easing in May, which will complement the expansion of the funding for lending scheme.
Source: Schroders
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