Final economic "test" paints bleak picture for UK

Published on Friday 23 April 2010 23:27

GORDON Brown has been dealt another blow after the fragility of the UK economy was exposed in new figures showing slower than expected economic growth.

Gross domestic product (GDP) went up by just 0.2 per cent between January and March – down from 0.4 per cent between October and December – partly due to January's heavy snowfall.

The UK is at least not heading for a double-dip recession, although the threadbare growth has heralded dire warnings from politicians and business leaders.

The Institute of Directors (IoD) said the figures re- enforced its belief that the recession would be "L" rather than "V"-shaped, meaning the recovery would be slower than some had hoped.

The figures are estimates and may yet be revised up or down, but they will be the last delivered before the General Election.

The leaders of the three main parties traded blows over which party is now best placed to strengthen the economy and protect jobs.

Mr Brown could at least be relieved the economy avoided plunging back into negative growth. The Prime Minister said the figures were "defying the predictions of doom and gloom from those who would always talk Britain down".

He added: "The recovery is fragile. We aren't out of the woods yet and we must do nothing to put the recovery at risk."

Conservative leader David Cameron accused Labour of being too weak.

"They are disappointing figures for the economy because we have had the very long, very deep recession and we need to get the economy moving," he said.

"What we are seeing so far is a rather jobless recovery and a government that is too weak to get things done. We need a decisive government to take the steps to get the economy moving, to deal with our debts."

Liberal Democrat leader Nick Clegg said the figures "showed we are nowhere near coming out of the dark shadow of this very deep recession".

He added: "We need to do much more to get growth going in this country, to sort out the banks, to make sure we provide jobs and opportunity for young people."

Graeme Leach, chief economist at the IoD, said: "The GDP figures confirm our view that the recovery will look much more L than V-shaped.

"The IoD disagrees with the government that reining in public spending this year will damage the recovery. At times of fiscal crisis, a contraction based on lower spending is very likely to encourage faster GDP growth – from a lower deficit and long-term interest rates. The longer we delay the public spending squeeze, the longer we delay a stronger recovery."

Howard Archer, chief UK and European economist at IHS Global Insight, said the quarter's figure was "not in itself overly worrying". He continued: "Overall growth in the first quarter was clearly dragged down appreciably by the very bad weather in January, and most indicators suggest that there has been a marked pick-up in activity since then."

He forecast that growth would be limited to 1.1 per cent this year, and warned that a sustained recovery still faces a number of "significant economic and financial obstacles", including tight credit conditions, consumers' reluctance to spend and high unemployment.

Joblessness rose to a 16-year high of 2.5 million in February, including 208,000 in Scotland – the highest level since July 1997.

However, economists believe that the GDP estimate may yet be revised up, particularly as growth in the last quarter in 2009 was initially placed at 0.1 per cent, but later changed to 0.4 per cent.

The preliminary estimate, from the Office of National Statistics, is based on less than half the data needed to show a complete picture.

Hetal Mehta, senior economic adviser to the Ernst & Young ITEM Club, said the figures were "out of sync" with more positive data from recent surveys.

"Based on the revisions we have seen to the preliminary estimates in recent quarters, there is a fair chance of an upward revision," she said.

Lee Hopley, the chief economist at manufacturing organisation EEF, said the economy "now seems to have turned a corner", despite the only "modest" expansion in the quarter.

"Manufacturing continues to play a more substantial role in the recovery, with output up more than 1 per cent on a year ago," he said.

"However, it will be the decisions on tax and spending that come after the election that will determine whether more balanced growth can be sustained as the recovery continues."

The ONS said there was anecdotal evidence that the Arctic weather conditions at the beginning of the year had hit output growth, but said it could not quantify the extent of the impact.

Service industries, which make up 76 per cent of output, increased 0.2 per cent in the period. The ONS said business services and finance accounted for the largest contribution to positive growth in the quarter.

Production, transport, storage and communication, and government services also helped with strong showings

But growth was weighed by decreases in construction, which fell 0.7 per cent, hotels and restaurants and distribution.