April 23, 2010 / 1:36 AM / 10 years ago

GDP growth weakens unexpectedly after icy weather

LONDON (Reuters) - The economic recovery lost ground in the first three months of this year as the harshest winter in three decades hit retailers and industry, official data showed on Friday.

A man walks out of the Royal Exchange in the City of London April 23, 2010. REUTERS/Toby Melville

The reversal of a year-long reduction in value-added-tax in January may also have had a temporary impact, though strong recent manufacturing surveys suggested there was room for future estimates of first quarter growth to be revised up.

The Office for National Statistics said GDP increased by 0.2 percent in the quarter, half the 0.4 percent rate forecast by analysts who had expected growth to continue at the same rate as in the last three months of 2009.

The figures gave the Labour Party a chance to reprise its charge that the economic recovery remains too fragile for fiscal tightening of the scale being proposed by the Conservatives in campaigning for a May 6 national election.

“The dangers of the Conservative policy of cutting ... 6,000 million pounds out of the economy as they propose for an emergency budget in June are as grave as they are ill-judged,” Prime Minister Gordon Brown told a news conference.

Conservative shadow chancellor George Osborne countered: “We now have this jobless recovery from this weak government.”

Opinion polls put those two parties, along with Liberal Democrats, within a few percentage points of each other, making it highly likely that the government that emerges from the election will need at least some cross-party support to pass key budget measures.

The next government will have to make dramatic cuts to public spending or raise taxes sharply to curb record high borrowing, which is likely to make Britain’s recovery from its deepest downturn since the 1930s even more arduous.

The government expects GDP growth of 1-1.5 percent this year, while private sector economists on average reckon an expansion of around 1.1 percent is more likely.

“The focus now is on reducing the deficit by cutting spending and raising taxes, but also, crucially, it is also dependent on a return to robust and sustained GDP growth,” said Andrew Smith, chief economist at KPMG.

However, ratings agency Moody’s said Friday’s growth data was in line with its expectation of slow economic recovery which had been taken into account when maintaining an AAA rating and stable outlook for British government.

REVISIONS AHEAD?

The 0.2 percent overall GDP growth was at the bottom of the range of forecasts from a Reuters poll of 33 economists, but analysts noted that the ONS’s preliminary estimates of GDP were frequently revised higher.

An initial reading of 0.1 percent growth for the last quarter of 2009 eventually ended up at 0.4 percent.

The ONS said there was anecdotal evidence that icy conditions earlier this year, which brought much of the UK to a standstill, depressed output from both the retail sector and industry in the first quarter.

The pound dropped almost half a cent against the dollar and lost a quarter of a cent versus the euro after the data, which also showed that GDP fell by 0.3 percent compared with a year ago, the smallest annual decline since autumn 2008.

This first snapshot of the economy is based on only 40 percent of the data that goes into the third and final GDP estimate, leaving a considerable margin for an upward revision.

In addition, recent purchasing managers’ surveys for manufacturing and services have been firmly pointing to growth in activity, leading further room for improvement in the data.

“It’s likely that the underlying pace of recovery is greater than these figures suggest,” said Philip Shaw, economist at Investec.

Friday’s data showed distribution, hotels and restaurants — which includes retail and makes up 15 percent of the economy — bore the brunt of the bad weather and contracted by 0.7 percent, the biggest drop since the first quarter of 2009.

Business services and finance grew by 0.6 percent, its best performance in two years, while the overall service sector — three quarters of the economy — grew 0.2 percent.

Industrial production grew by 0.7 percent on the quarter, its strongest pace in four years.

The figures reinforced most analysts’ view that the recovery will be sluggish after an 18-month recession that has wiped out 6 percent of economic output, making it likely that the Bank of England will keep interest rates at their record low 0.5 percent until at least the end of this year.

“With the recovery still very fragile and a major fiscal tightening ahead under any form of government, suggestions that the MPC should soon be tightening monetary policy to ward off inflationary pressures seem clearly premature,” said Jonathan Loynes at Capital Economics.

Editing by Mike Peacock, John Stonestreet

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