Service sector bright spot as UK economy fails to ignite

The ONS says the economy grew by a pretty lacklustre 0.5% in Q1 - but services enjoyed their strongest growth for nearly five years.

by James Taylor
Last Updated: 19 Aug 2013
The much-anticipated initial estimate of first quarter GDP growth is finally with us, and it's nothing to write home about. The Office for National Statistics says the economy grew by 0.5% during the first three months of the year - which basically means that we barely even recovered the ground lost during the snow-related disruption before Christmas. The Government insists we're on the right track, but this isn't exactly a ringing endorsement of its approach. Although glass-half-full types will note that the service sector did enjoy its best quarter since Q4 2006...

You'll recall that the economy surprisingly shrank by 0.5% in the fourth quarter of 2010, confounding the City's expectations of a slight expansion. So today's figure (which was bang in line with City forecasts) means that we're almost - but not quite - back to where we were at the end of Q3 2010. So although the economy is now 1.8% ahead of this time last year, that still means we've basically gone nowhere for the last six months of that.

OK, so any kind of growth is better than nothing - and it's certainly better than another contraction, which would have officially put us back in recession. But this isn't exactly the kind of number that suggests the recovery is powering ahead as George Osborne et al might like. It's also well below the 0.8% prediction of the Office for Budget Responsibility, making its full-year forecast of 2.6% growth look even more wildly optimistic - particularly since CBI data yesterday suggested the recovery in the manufacturing sector was slowing down a bit.

Now there is one major caveat here. There's a big margin for error with this data at the best of times, and this is just the ONS's preliminary estimate, based on 42% of the final data. There are two revisions to come, and historically the number tends to go up rather than down. Economists have already expressed scepticism about the data from the construction sector, which supposedly contracted by 4.7% - its biggest drop since Q1 2009.

And it wasn't all bad news: the services sector grew by 0.9%, its best showing since 2006 (led, interestingly, by the banks - food for thought for those who think we'd be better off without them). Equally, mortgage-holders may be cheered by the thought that a growth figure like this probably rules out an interest rate hike any time soon - the Bank of England will (quite rightly) be worried about doing further damage to a recovery that already looks anaemic at best...

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