May 23, 2013 / 8:37 AM / 6 years ago

Signs of weakness mar UK economic growth

LONDON (Reuters) - Britain’s better-than-expected economic growth in the first quarter turns out to have been boosted by a rise in inventories, while consumer spending was weak and investment fell, raising questions whether the nascent recovery will last.

A market stall is seen between two High Street shops on Oxford Street in central London December 13, 2011. REUTERS/Olivia Harris

Britain avoided falling back into recession when official data, first released in April, showed its economy grew 0.3 percent between January and March from the previous quarter.

The Office for National Statistics confirmed the headline number on Thursday and said growth was 0.6 percent higher than a year earlier, also in line with the preliminary figure.

Economists had expected no revision to either figure but they expressed disappointment at the weak underlying picture of the economy from the new details.

“The breakdown of the data is rather disappointing and not that supportive to hopes that the economy is establishing a firmer footing,” said Howard Archer, economist at IHS Global Insight.

“There were declines in investment and exports, which hardly points to an economy rebalancing. Meanwhile, government spending was flat as spending cuts likely increasingly impacted.”

Britain’s government has fended off calls to spend more to boost growth three years into its drive to close one of the European Union’s biggest budget deficits.

On Wednesday, the International Monetary Fund welcomed some signs this year that the economy is slowly healing but stressed it remained weak and called on the government to spend more now on investment to speed up the recovery.

Thursday’s data showed consumer spending ticked up only 0.1 percent on the quarter, its weakest rise since the third quarter of 2011, although it remained one of the economy’s main engines.

The biggest contribution to GDP growth came from an increase in inventories as companies’ stocks piled up in a likely sign of weak demand.

Stock-building added 0.4 percentage points to growth on a measure that aligns GDP output data with the more limited expenditure data available so far. On an unaligned basis, inventories added 0.2 percentage points to growth.

“There is still a significant part of the inventories move that might reflect an unwanted build-up of stocks that will be a downside to growth going forward,” said David Tinsley, an economist at BNP Paribas.

A 0.8 percent fall in exports outweighed a 0.5 percent drop in imports, so that net trade dragged on the economy. Britain is struggling to rebalance its output towards goods exports after it was punished during the financial crisis by its reliance on sectors such as banking.

Business investment shrank 0.4 percent.

Speaking after the GDP release, Bank of England policymaker Ben Broadbent said growth was still below potential even if he was more optimistic about the economy than some of his peers, and that there remained a case for very easy monetary policy.

On the output side of the economy, Britain’s dominant services sector was confirmed as the main source of growth, rising 0.6 percent in the first quarter of 2013 after flat-lining in the last three months of 2012.

Industrial output was 0.2 percent higher, while construction contracted by 2.4 percent.

The ONS also released data on the service sector in March, when its output was 0.2 percent higher than in February.

Editing by Catherine Evans

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