Weakest economic growth in five years casts doubt over Bank of England rate rise

The British economy grew at its slowest pace in five years in the first quarter, raising further doubt over a Bank of England interest rate hike next month.

The Office for National Statistics (ONS) said gross domestic product (GDP) grew by 0.1% in its initial estimate for January to March.

It was the weakest quarterly growth since the fourth quarter of 2012 and worse than economist predictions for a slowdown to 0.3%.

It compares to 0.4% in the final quarter of 2017.

UK economic growth (GDP)
UK economic growth (GDP)

While many thought the so-called Beast from the East would have hit Britain's economy hardest, official figures showed that recent snowfalls had a relatively small effect on growth.

ONS spokesman Rob Kent-Smith said: "Our initial estimate shows the UK economy growing at its slowest pace in more than five years, with weaker manufacturing growth, subdued consumer facing industries and construction output falling significantly.

"While the snow had some impact on the economy, particularly in construction and some areas of retail, its overall effect was limited with the bad weather actually boosting energy supplies and online sales."

It dampens prospects of an interest rate hike by the Monetary Policy Committee on May 10.

Experts had widely expected rates to rise above 0.5% with another rise having been factored in for November.

Ben Brettell, senior economist at Hargreaves Lansdown, said: "The news casts further doubt over a May interest rate rise.

"As recently as last week markets were pricing in a near 90% chance that the Bank of England would raise rates next month, but this fell to more like 50% after comments from Mark Carney suggested potential 'softer' economic data and continued uncertainty over Brexit meant policymakers weren't wedded to a May hike."

Rate-setters will also have to consider recent easing in inflation rates, with the Consumer Price Index (CPI) of inflation having dropped back from 2.7% to 2.5% in March - marking a one-year low and bringing it closer to the Bank's 2% target.

"Today the market's saying there's just a 25% chance that rates will move in May," Mr Brettell said.

The pound tanked in the wake of the release as traders "hastily" revise their interest rate expectations.

Sterling tumbled 0.9% versus the greenback to 1.378 - its lowest level in nearly two months, and dropped 0.6% against the euro zone currency to 1.141.

ONS figures showed that construction was the biggest drag on GDP - dropping 3.3% over the first three months of the year - which was its most dramatic fall since the second quarter of 2012.

Manufacturing growth slowed to 0.2%, though that was partially offset by a rise in energy production due to colder weather.

The UK's powerhouse services sector - which accounts for around 79% of the economy - was the biggest supporter of GDP growth in the first quarter, having increased by 0.3% thanks in part to business services and finance.

However, the ONS noted that longer term trends point to weakening growth in the services sector.

#BOE expected Q1 #UK#GDP#growth to be 0.3% q/q in minutes of March #MPC meeting. Saw "measurable" snow impact but underlying expansion same as in Q4 2017 (when economy grew 0.4% q/q). So actual Q1 expansion of just 0.1% q/q is certainly food for thought for MPC at May meeting https://t.co/j3YDludpdZ

-- Howard Archer (@HowardArcherUK) April 27, 2018

It comes amid a squeeze on consumer finances from higher inflation, triggered by the Brexit-induced collapse in the pound, and slow wage growth

James Smith, a developed markets economist at ING, said consumer caution played a "big part" in the first quarter growth figures.

"Evidence from the consumer sector suggests that it was one of the worst quarters for retailers since the crisis.

"It's also worth remembering that industrial production, which grew by 0.7% in the first quarter, will have been flattered by the recovery in oil output following the pipeline outage back in December. Without that, the economy may not have grown at all.

He added that the Bank of England is now likely to wait until August before considering another rate hike, "to see how things evolve".

"Brexit has the potential to get quite noisy as we head into the autumn, and the latest growth data sends a clear signal that the economy is not out of the woods just yet.

"With core inflation also set to fall back to target in the next 2-3 months, we still think it's pretty unlikely that the Bank will hike more than once this year.

The UK economy is still struggling to bounce back to levels seen in the final quarter of 2016 when GDP rose by 0.6%.

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