27 Apr 2011

British GDP grows by 0.5 per cent

Britain’s economy has recovered by just 0.5 per cent at the start of 2011, undermined by a big drop in construction, and Labour has seized upon the results to criticise Chancellor George Osborne.

Gross domestic product expanded by 0.5 per cent between January and March, in line with forecasts.

But because it contracted by the same amount in the final three months of 2010, Britain’s economy is no bigger now than it was last September, and is lagging behind other leading economies.

The recovery in the first quarter is weaker than either the Bank of England or the Office for Budget Responsibility had pencilled in earlier this year and has fuelled opposition criticism of the government’s austerity measures, many of which have yet to kick in.

Shadow Chancellor Ed Balls said: “These figures show an economy that has flatlined since the autumn. By making a political choice to cut further and faster than any other major economy this Conservative-led government has choked off the recovery when it should have been secured and pushed up unemployment too. In the six months since George Osborne’s spending review and VAT rise the economy has ground to a complete halt and not grown at all. In contrast, in the previous six months, the economy grew by 1.8 per cent. Moreover the economy has flatlined before the bulk of the spending cuts and tax rises have kicked in.

If George Osborne thinks zero growth over six months is good news then he is more out of touch and out of his depth that I fearedEd Balls

“Today’s figure is significantly lower than the Office for Budget Responsibility’s most recent forecast, which has already been downgraded three times. And these figures raise the very real possibility of the OBR having to downgrade its growth forecast for 2011 a fourth time.”

George Osborne - Getty

He added: “If George Osborne thinks zero growth over six months is good news and a sign that the recovery is on track then he is more out of touch and out of his depth that I feared.”

But markets had already been bracing for a weak reading and sterling rallied as investors drew a sigh of relief that key sectors of the economy, such as manufacturing and services grew at a healthy pace. Services grew by 0.9 per cent on the quarter and manufacturing by 1.1 per cent.

GDP: are economists obsessed with figures?

The Office for National Statistics said the rebound was little more than an arithmetic effect following the Q4 contraction and the underlying growth picture was broadly flat. Overall, the recovery appears too weak to convince the majority of Bank of England policymakers to raise interest rates, despite inflation running at twice the central bank’s 2 percent target.

Economics editor Faisal Islam gives his verdict on what the growth actually means for the economy:

Hurrah! Through dextrous economic manoeuvring the Coalition has deftly avoided the dreaded double dip. Just the tonic in this joyous week of national celebration? Right?

Well, the economy is not growing. It has been totally stagnant since the end of September. As the ONS chief economist has just told me, the 0.5 per cent growth number announced today for the first quarter, would be zero, were it not for the snow. If you take away the snow, you have an economy on a perfectly flat plateau.

0.5 per cent is merely the arithmetic bounceback from the temporary snow-based shrinkage in the economy in the final quarter of 2010. A true Lord of Doom could point out that the size of the UK economy is almost certainly very marginally smaller today than it was at the end of September. The numbers for that will be revealed in the second reading on q1 next month. But for any meaningful statistical purpose it is flat.

Money markets show investors see only a 50 per cent chance of a rate hike by August and are overall pricing in only one quarter-point rate hike by the end of the year.

The government welcomed the economy’s return to growth and said the recovery was always going to be choppy.