Business

Beast from the East 'weighed heavily on economic activity'

The Beast from the East sent a chill over the UK's economy in the first quarter, prompting experts at the EY ITEM Club to predict that gross domestic product (GDP) could be cut in half when the Office for National Statistics reveals data on Friday

The Beast from the East sent a chill over the UK's economy in the first quarter, official figures are expected to show this week.

Experts at the EY ITEM Club are predicting that gross domestic product (GDP) could be cut in half from 0.4 per cent in the fourth quarter to as low as 0.2 per cent when the Office for National Statistics reveals data on Friday.

The preliminary figures will shed light on the economic cost of heavy snowfall that brought parts of Britain to a standstill last month, and will play a part in determining the course for interest rates this year.

"The severe weather seen at the end of February and the first half of March appears to have weighed down significantly on economic activity at the beginning of the year.

"The EY ITEM Club expects that GDP growth in the first quarter of 2018 was dragged down to around 0.2-0.3 per cent quarter-on-quarter," the Item Club said.

The forecast chimes with that of PwC and the National Institute of Economic and Social Research (NIESR), which have also pencilled in similar levels of reduced growth.

Retailers bore the brunt of the extreme weather, which saw people stay away from the high street. This was reflected in official figures out last week, which showed that retail sales recorded their biggest quarterly fall in a year.

The Item Club predicts GDP will bounce back to 0.5 per cent in the second quarter as some of the economic activity lost to the severe weather is made up.

However, for the year it expects GDP to grow by 1.6 per cent in 2018, a downgrade from an earlier forecast of 1.7 per cent, which would have matched 2017's figure.

Howard Archer, chief economic adviser to the EY ITEM Club, described British economic growth as "steady but uninspiring", and warned over Brexit risks and a potential hike in interest rates over 2018.

He said: "The UK economy is chugging along at a fairly steady, but uninspiring rate.

"Inflation, which impacted consumer spending last year, continues to drop and we expect a tight jobs market to deliver some uptick in pay growth.

"Significantly, a transitional Brexit agreement between the UK and EU has been agreed which should also bring some certainty to businesses and support investment.

"However, these factors may be offset by rising interest rates, a recovery in sterling's value and still appreciable Brexit uncertainties bringing new headwinds over the year."

The Item Club is still penciling in two interest rate hikes from the Bank of England in 2018, despite mixed messages from Threadneedle Street.

Rate setter Michael Saunders on Friday brushed aside recent weak economic data as a reason for holding rates at 0.5 per cent, saying that the significance of the slowdown is "questionable".

Bank Governor Mark Carney, however, has cautioned markets that a rate rise in May is not a certainty.

Inflation fell back to 2.5 per cent from 2.7 per cent in March, a one-year low, easing pressure on the Bank to act.

Mr Archer said that raising interest rates this year is not an "open and shut case".

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