The UK economy slowed in the third quarter as weak construction and manufacturing took their toll on growth but economists remain confident Britain can shrug off the summer blip.
National income expanded by 0.5 per cent in the three months to September, the Office for National Statistics said, down from 0.7 per cent in the second quarter and less than analysts had expected.
The disappointing performance is likely to weigh on the Bank of England’s Monetary Policy Committee, which is considering the first increase in interest rates since the crisis. Mark Carney, BoE governor, said at the weekend that while the UK should prepare for a rate rise, it was not a certainty.
However, economists believe a strengthening jobs market, with unemployment back at pre-crisis levels and wages finally picking up, will be able to sustain growth in the latter part of the year.
“Today’s growth number . . . increases the likelihood that the MPC wait longer before raising interest rates,” said Simon Wells at HSBC. “However, today’s number is not a disaster [and] our reading of the survey data are that there is little to indicate a further slowing in growth.”
The numbers may prove more of a challenge for George Osborne who is in the middle of a parliamentary revolt over plans to cut tax credits for the working poor, as part of his deficit-reduction strategy.
The chancellor welcomed the figures, saying they showed that Britain continued to outperform other western economies. However, he showed little sign of change to his economic strategy, adding he would “continue to make the tough decisions required so that Britain lives within its means”.
Overall, the ONS estimated gross domestic product to be 2.3 per cent higher than a year ago and 6.4 per cent above its pre-recession peak in the first quarter of 2008.
Manufacturing output fell 0.3 per cent between the second and third quarter, as factories struggled with a strong pound and a slowdown in overseas markets. Construction was down 2.2 per cent, though this figure is typically volatile and may be revised later.
But a rebound in mining and quarrying helped overall industrial production rise by 0.3 per cent. The services sector, which constitutes the bulk of the economy, expanded by 0.7 per cent compared with the three months to June.
“The breakdown will probably reinforce concern that UK growth remains too reliant on the services sector and on consumer spending,” said Howard Archer, chief UK and European Economist at Global Insight.
“The big question for growth is whether latent world worries spread, potentially via elevated uncertainty, into UK consumer and corporate spending plans,” said Robert Wood at Bank of America Merril Lynch. “We see little sign of that so far, and . . . we still look for growth to return to a 0.6 per cent/0.7 per cent pace through next year.”
The Bank of England, which publishes its quarterly Inflation Report next week, is likely to see the figures as another reason to delay a rate rise which markets are currently expecting in the first quarter of 2017.
However, some analysts warn policymakers may take the slowdown as a sign that productivity is recovering more slowly than the BoE expected. This could force the MPC to raise rates sooner to avoid inflation rising too quickly from its current level of -0.1 per cent.
“Our estimates suggest that productivity growth slowed from 0.9 per cent quarter-on-quarter in Q2 to around 0.5 per cent in Q3,” said Chris Hare at Investec Economics.
“If wage growth keeps rising, and that is not accompanied by rises in. productivity growth, companies will see increases in their unit labour costs [and that] will put upward pressure on inflation and make the MPC more inclined to raise interest rates sooner.”