October 24, 2014 / 8:36 AM / 5 years ago

Rapid UK recovery starts to slow from previous red-hot pace

LONDON (Reuters) - Britain still looks on track to outpace other advanced economies this year after rapid growth eased only slightly in the three months to September, but a euro zone slowdown could hamper the recovery in the run-up to next May’s election.

A traffic sign is pictured in front of the skyline of the the Canary Wharf financial district in London October 21, 2010. REUTERS/Luke MacGregor

Official data on Friday showed the economy expanded by 0.7 percent in the third quarter, compared with 0.9 percent the quarter before - in line with forecasts in a Reuters poll.

While the pace of growth was still above Britain’s long-run average, the upturn slowed in the service industries that dominate the economy, and manufacturing output rose at its weakest pace in 18 months.

Few economists expected Britain’s previous quarterly economic growth rate - one of the highest in almost a decade - would be sustained.

But the slowdown will do nothing to alleviate concern that the euro zone’s economic malaise may take a greater toll before May’s national election, when the government’s economic legacy after years of austerity will take centre stage.

Finance minister George Osborne welcomed the data but said growth could slow further because of external factors.

“The UK is not immune to weakness in the euro area and instability in global markets, so we face a critical moment for our economy,” he said.

His ruling Conservative Party hopes Britain’s recent economic performance will convince voters to keep it in power. But the opposition Labour party says most Britons are not seeing the benefits of the recovery, because wage growth remains minimal.

“(Osborne) can’t blame the euro zone for the fact that people will be worse off by the end of this parliament than the beginning,” Labour finance spokesman Ed Balls told BBC News.

Economists said Friday’s data alone would probably have little bearing on when the Bank of England raises interest rates, although signs of slowing overseas demand will concern its policymakers.

The Office for National Statistics said output grew 3.0 percent from the third quarter of 2013, down from an annual rate of 3.2 percent in the second quarter. Total economic output is now 3.4 percent higher than its pre-crisis peak in early 2008.

Sterling edged up to a day’s high against the dollar after the data, while British government bond prices were little changed.

BOE OUTLOOK UNCHANGED, FOR NOW

The BoE said on Wednesday that its staff estimated Britain’s economy grew by 0.9 percent in the third quarter. That is based on what it thinks the final estimate of GDP will be, which uses more than twice the data as in the ONS’s preliminary estimate and is sometimes higher.

With few signs of inflationary pressure and growing risks from the euro zone, most BoE policymakers opposed raising interest rates from their record low 0.5 percent, according to minutes from their October meeting.

The immediate outlook for overseas demand is unpromising. Industry surveys show exporters have suffered from Europe’s slump.

“The Monetary Policy Committee may be justified in worrying that growth may slow further in Q4 given international developments, but for now growth is evolving as it expected in August,” said HSBC economist Simon Wells.

The consensus of economists polled by Reuters suggests the BoE will hike rates in the first quarter of next year, although market expectations suggest a rate rise may come significantly later in the year.

Cleaners abseil down one of the faces of Big Ben, to clean and polish the clock face, above the Houses of Parliament, in central London August 19, 2014. REUTERS/Toby Melville

The data showed Britain’s services industry, which accounts for more than three-quarters of the economy, slowed the most during the quarter. Growth dropped to 0.7 percent from 1.1 percent.

Factory output growth declined to 0.4 percent on the quarter from 0.5 percent, its slowest rate since the first three months of 2013.

Economists polled by Reuters see quarter-on-quarter growth of 0.6 percent in the final three months of this year and in each quarter of next year. [ECILT/GB]

Editing by Larry King

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