Flagging industrial production and construction output dragging down economic growth

The UK economy's lacklustre start to the year is expected to continue as flagging industrial production and construction output drags on second-quarter growth.
By Ben Woods, Press Association Chief City Correspondent

The UK economy's lacklustre start to the year is expected to continue as flagging industrial production and construction output drags on second-quarter growth.

Economists are expecting gross domestic product (GDP) to expand by 0.3% between April and June when official figures are released on Wednesday.

It would mark a slight improvement on first quarter growth of 0.2% when the services sector stuttered as inflation dealt a blow to consumer spending.

The Office for National Statistics (ONS) revised down its initial estimate for the first three months of the year from 0.3% to 0.2%, indicating an even deeper slowdown compared to the 0.7% growth seen in the fourth quarter of last year.

Howard Archer, chief economic adviser to EY Item Club, is pencilling in 0.3% growth for the second quarter but said a rebound may not materialise.

He said: "It looks odds-on that whatever growth the UK managed to eke out in the second quarter will have been solely due to the services sector.

"This does appear to have seen some pick-up in activity after a particularly weak first quarter performance.

"Industrial production and, especially, construction output both fell month-on-month in April and May, and were clearly on course for contraction over the second quarter.

"Despite decent overall manufacturing surveys for June, we suspect industrial production could have contracted by around 0.4% quarter-on-quarter in the second quarter while construction output may have fallen by around 1.7% quarter-on-quarter.

"This will obviously have held back UK GDP growth in the second quarter, although it needs to be borne in mind that industrial production's share of GDP is limited to 14.6% while construction only accounts for 5.9%."

The second-quarter update comes after a series of downgrades from economists who are anticipating GDP to slow in the coming years as Britain embarks on its EU divorce.

Professional services firm PwC expects GDP to grow by 1.5% in 2017, revising down a previous estimate of 1.6% growth.

The influential EY Item Club has also nudged down its GDP outlook from 1.8% to 1.5% in 2017, saying the UK economy has deteriorated since April.

Credit rating agency Moody's warned on Monday that the UK economy could be tipped into recession if the UK fails to land a deal with the 27-nation bloc.

Such an outcome would trigger "significant macroeconomic disruption" and the chance of an "outright recession" as unemployment and inflation rise, the organisation said.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, has taken a more pessimistic view and expects GDP growth of 0.2% for the second quarter.

He said growth of this magnitude would hold back the Bank of England from raising interest rates, confirming that the UK economy was "far too fragile to withstand tighter monetary policy".

The likelihood of the Bank's Monetary Policy Committee (MPC) hiking rates from record lows of 0.25% shifted down a gear on Tuesday when the latest inflation figures came in at 2.6% for June, down from a near four-year high of 2.9% in May.

Bank governor Mark Carney said at the end of last month that "some removal of monetary stimulus is likely to become necessary", but would depend on whether an increase in business spending could counter the slowdown in consumer spending.

Concerns over rising inflation caused three out of the eight Monetary Policy Committee (MPC) members - Ian McCafferty, Kristin Forbes and Michael Saunders - to unexpectedly back a move to increase rates to 0.5% during the last vote on monetary policy.

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