Sluggish UK economic growth not seen as a slowdown

The pace of economic growth in the UK might have halved in the first quarter, but the message from economists is unambiguous: don't panic yet.

Just nine days before the general election, the Office for National Statistics reported on Tuesday that the UK economy grew just 0.3 per cent in the first quarter, down from 0.6 previously.

While economists had been braced for weak data, few had expected the economy to have its worst quarterly performance since the end of 2012. But John Hawksworth, chief economist at consultancy PwC, caught the mood of many, saying the data indicated "a wobble rather than the start of a serious slowdown".

After an initial dip, sterling bounced back against the dollar to its highest level in nearly two months.

Top of the list of reasons for the widespread confidence in the outlook despite the slowing official data was the continuing strength of unofficial business survey data. John Cridland, director-general of the Confederation of British Industry, said the feedback from his members was that the economy was "more resilient" than the official figures suggested.

Chris Williamson, chief economist of survey data company Markit that produces the closely watched PMI surveys, said they indicated growth should "bounce back in the second quarter".

Secondly, this month Britain's employment rate climbed to a record while the jobless total was at its lowest for almost seven years, indicating hiring momentum in the economy remains strong.

Finally, only about half of the data that will make up the final gross domestic product data are available to statisticians for this first estimate. Since 2010, the average upward revision has been a touch below 0.1 percentage points a quarter, with the biggest revisions taking place about two years after the release.

Kevin Daly, senior economist at Goldman Sachs, said he believed there was a downward bias in early GDP data, with business surveys and labour market data providing a more accurate guide to "post-revision" GDP data.

Goldman Sachs' calculations suggest that Q1 GDP will be revised "significantly higher over time", perhaps to 0.7 per cent, he said.

But there remain areas of concerns. While economists had been anticipating weakness in the production and construction industries, there was a notable downward surprise in the service sector data.

A slowdown in the business and financial services sector, which grew just 0.1 per cent compared with 1.3 per cent in the previous quarter, drove the overall growth rate in the service sector to 0.5 per cent, lower than the 0.9 per cent previously.

Sam Hill, senior UK economist at RBC Capital Markets, pointed out that this was the slowest growth rate for the sector, which represented roughly 30 per cent of the total economy since the end of 2010. "It is not clear whether or not election-related uncertainty has constrained activity in this very confidence-dependent part of the economy," he added.

Ross Walker, senior UK economist at RBS who has been on the more pessimistic end of City forecasters, said the "extent of the slowdown [in services] does give pause for thought".

The question was whether growth would "settle at these sub-trend rates or, alternatively, whether the economy will stage a more sprightly pick-up", he said.

Even if growth in the service sector does bounce back over coming months, with the construction sector in technical recession after having contracted for two consecutive quarters and the manufacturing sector buffeted by headwinds from abroad, ambitions to rebalance the economy have stalled.

While services have recovered from the downturn, production, construction and agriculture are still lagging far behind, and whatever the size of revisions, this broad picture is likely to remain unchanged.

And there are voices who argue that the period of strong non-inflationary growth could be drawing to a close. In a note to clients Fathom Consulting, which has been pessimistic about the outlook for the UK economy for a long time, said "this is not a temporary slowdown, but a return to the 'new normal'".

Slower growth, set alongside rising employment, is also bad news for the Achilles heel of the UK economy - productivity - and with it the chance that take-home pay will begin to rise strongly. Excluding bonuses, pay is about 1.8 per cent higher than a year ago, but before the financial crisis average pay typically rose at about 4 per cent a year.

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