Slow GDP growth in first quarter puts pressure on Osborne

George Osborne Close Up

George Osborne’s stewardship of the economy is expected to take a dent on Tuesday when the latest official figures show last year’s healthy growth has lost momentum.

With just over a week until the election, the chancellor will come under pressure from critics following a run of poor figures from the manufacturing and construction sectors that City economists predict have slowed growth in the first quarter.

Osborne has already come under fire for presiding over a recovery that has failed to lift living standards above pre-crisis levels despite creating more than 1.5m jobs. Until recently, businesses have relied on a growing workforce of low paid, self-employed and part-time workers that has left productivity growth lagging behind most industrial nations.

Economists expect Tuesday’s figures to show that GDP growth slowed to a quarterly 0.5% in the first three months of this year, down from 0.6% in the final quarter of 2014.

Weaker than expected industrial production, construction output and high street sales in recent months, have even encouraged some economists to pencil in a halving in the growth rate to 0.3%, according to a Reuters poll.

While first estimates of GDP are often revised in later months, a weak number on Tuesday will come at a bad time for the Conservatives and their coalition partners, the Liberal Democrats.

“With the first quarter GDP number published only nine days before the election, a disappointing reading could cause a headache for the incumbent parties, particularly given their desire to emphasise their economic credentials,” said Andrew Goodwin, UK economist at the consultancy Oxford Economics.

He is forecasting that growth could come in as soft as 0.4% but adds: “We do not think that such a low number would necessarily be an accurate depiction of the true strength of the economy.”

Quarterly growth and levels of GDP

GDP growth
The ONS estimated the UK economy grew 0.6% in the final quarter of last year, matching the pace of expansion seen in the third quarter. If economists’ forecasts are correct and growth slows to 0.5% in the first quarter figures, it will be the slowest pace of growth since the final quarter of 2013. Photograph: ONS

Howard Archer, economist at IHS Global Insight, agreed that while growth prospects remain “decent” for the UK economy, the latest numbers could well play a crucial role at the ballot box.

“Given that the Conservatives and Liberal Democrats are hoping that many undecided voters will ultimately decide to vote for them due to their management of the economy, any slowdown in growth would be very unwelcome news just over a week before the general election,” he said.

Economic data points to new year slowdown

Official monthly output figures (% 3months/3months)
News from across the economy’s main sectors points to a slower pace of growth in the opening months of 2015. This chart shows official monthly output figures (% 3months/3months), including a Capital Economics estimate on services. Photograph: Capital Economics, Thomson Datastream

Critics of Osborne’s lopsided recovery, which has favoured the south and the service industries, complain that young and low paid workers have played a bigger part in the recovery than official figures show.

The TUC said analysis of jobs figures showed that in addition to the 700,000 workers who report being on zero-hours contracts, there were another 820,000 UK employees who report being underemployed on between 0 and 19 hours a week.

Underemployed workers were typically paid a much lower hourly rate than other employees, the TUC said, with the average hourly wage for a worker on fewer than 20 hours a week reaching just £8.40 an hour, compared to £13.20 an hour for all employees.

A survey last week of households by financial data provider Markit showed that most believed they would get a maximum 1% pay rise this year, which is less than the 1.8% average in official figures and likely to be offset by a return of inflation later in the year.

The downbeat GDP forecasts follow news last week of a surprise drop in retail sales in March as well as weak numbers from other sectors in recent weeks.

“The latest official output figures have suggested that the recovery has made a poor start to 2015. Output in the industrial, construction and services sectors of the economy all fell in January ... And construction fell by a further 0.9% in February, while industrial production rose by a mere 0.1%,” said economists at the thinktank Capital Economics.

The IMF and OECD expect growth to slip below the UK’s growth last year of 2.8%, which was the fastest pace of expansion since 2006, before the global financial crisis.

There have been warnings that growth could suffer a bigger slowdown if the election is followed by a long period of political uncertainty. With the polls tight, some business surveys have suggested investment decisions are already being postponed.

But there has so far been little sign of nervousness on financial markets, with the pound hitting a five-week high against the dollar of $1.514 on Friday.

“With two weeks to go to polling day it would be easy to say that domestic markets will be fixated on opinion polls and major speeches. However the reality is that so far at least, currencies, interest rate, gilt and equity markets have been far more sensitive to economic than political events,” said Philip Shaw, economist at the Investec.

“We suspect that markets may well react to uncertainty at some stage, but it may be that as in 2010, markets only begin to take notice the day after polling day.”

Powered by Guardian.co.ukThis article was written by Katie Allen, for The Guardian on Monday 27th April 2015 00.10 Europe/London

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