GDP grows feebly as household spending drops

Shoppers browse clothes in a store in central London February 15, 2011.

LONDON (Reuters) - The economy made a sluggish start to the year as an improved trade performance was more than offset by the sharpest fall in household spending since the recession, a second estimate of gross domestic product showed on Wednesday.

The figures highlight the challenge facing the government as it tries to rein in the budget deficit and will reinforce expectations that interest rates will stay at record lows for some months to come.

Figures from the Office for National Statistics confirmed an initial flash estimate, showing the economy grew just 0.5 percent in the first quarter after contracting by the same magnitude in the last three months of 2010.

This means the economy has effectively stagnated over the past six months -- a much worse performance than its major trading partners.

Economists had not forecast any revision and reckon the government's 2011 growth assumption of 1.7 percent is starting to look optimistic.

The Organisation for Economic Cooperation and Development (OECD) revised down its growth forecast in a twice-yearly report on Wednesday, projecting growth of just 1.4 percent for the year. It also forecasts an expansion of just 1.8 percent in 2012 compared to an official forecast of 2.5 percent.

"The lack of any upward revision leaves the economic recovery earlier this year still looking disappointingly weak," said Vicky Redwood at Capital Economics.

GOVERNMENT BOOST TO FADE

A breakdown of the figures showed growth would have been even weaker had government spending not grown by a robust 1.0 percent over the quarter. Public spending cuts mean this category will be unable to contribute to growth going forward.

Neither is the consumer in any position to drive the economy. Household spending contracted by 0.6 percent on the quarter, the biggest drop since the recession, and looks set to remain weak as wages fail to keep pace with inflation.

In a sign of mounting price pressures, the implied GDP deflator rose by 1.8 percent on the quarter, its biggest quarterly rise since 1996.

"These figures underline the significant weakness in the consumer sector," said Hetal Mehta, economist at Daiwa Capital Markets. "It reinforces our view that the majority of the (central bank's) Monetary Policy Committee will continue to vote for no change in interest rates this year."

Business investment fell by a whopping 7.1 percent on the quarter.

The only bright spot was trade which made its biggest contribution to quarterly GDP growth in more than 50 years. This pushed the trade deficit down to 5.7 billion pounds in the first quarter from 11.5 billion pounds at the end of 2010.

(Editing by Patrick Graham)