Return to growth forecast amid warnings economy is not out of the woods

THE coalition government's efforts to return the UK economy to a stable footing will receive a boost this week when official figures reveal modest GDP growth in the first quarter.

But economists are already warning that a return to expansion, following a shock 0.5 per cent slump at the end of last year, will not signal an end to the economy's woes, and concerns are mounting over depressed consumer sentiment.

Several polls of City economists show the average forecast for first-quarter GDP growth is 0.5-0.6 per cent.

Although such an outcome - when initial estimates are published by the Office for National Statistics on Wednesday - would mean Britain has avoided a double-dip recession, David Kern, chief economist at the British Chambers of Commerce, warned that the economy still faces several headwinds.

"My expectation of (first-quarter] GDP is a 0.6-0.7 per cent increase, which is really not very impressive as it would only just reverse the fall in the fourth quarter," he said.

Chris Williamson from research group Markit, which compiles the monthly purchasing managers' index surveys, warned that recent "disappointing" data from the construction and industrial sectors, in particular, could even point to growth of as little as 0.3 per cent, meaning that GDP over the two quarters put together would be -0.2 per cent.

"Disappointing industrial production, retail sales and construction figures suggest that growth may have remained weak. Our model is currently indicating a 0.4 per cent increase, but much will likely rest on the performance of the construction industry, which could cause growth to be as weak as 0.3 per cent," Williamson said.

While policymakers are expected to jump on this week's ONS numbers as a sign Britain is back on track, analysts suggest nothing but a figure of 1 per cent or more will hasten an interest rate rise, which is now not expected until later in the year.

Signs that households are battening down the hatches and sticking to rigid budgets as they did during the recession are understood to be troubling the Bank of England's Monetary Policy Committee.

David Owen, chief European economist at Jeffries International, said: "Q1 GDP would probably have to be a very strong release for the market to fundamentally change its view of the timing of the first rate rise."