Wednesday 10 July 2019 11:42 am

UK economic growth beats expectations but contraction worries remain

The UK economy expanded by 0.3 per cent in the three months to the end of May, official statistics have shown, beating analysts’ expectations of just 0.1 per cent growth.

Read more: UK service sector ‘close to stagnation’ as economy slows

The better-than-predicted growth, shown in data released today by the Office for National Statistics (ONS), came despite the economy contracting by 0.4 per cent in April as car plants shut down due to Brexit.

Sterling climbed from two-year lows against the dollar following the release of the figures. It had risen 0.1 per cent against the greenback shortly before midday UK time to buy $1.247.

The UK economy has slowed in recent months amid Brexit uncertainty and weak global growth, and analysts today remained gloomy about Britain’s prospects. Forward-looking indicators have shown a slowdown in the service, manufacturing and construction sectors.

GDP fell in April as car plants carried out planned shutdowns around the original Brexit date. ONS head of GDP Rob Kent-Smith said today’s headline growth figure “was mainly due to the partial recovery in car production” in May.

The service and production – which includes manufacturing – sectors contributed positively to economic growth in the three months to May, the ONS said, but the construction sector registered no growth.

Kent-Smith said: “GDP grew moderately in the latest three months, with IT, communications and retail showing strength. Despite this, there has been a longer-term slowdown in the often-dominant services sector since summer 2018.”

In May GDP grew by 0.3 per cent month on month after the fall seen in April. The three-month growth rate is a more reliable indicator of the economy’s health, however.

Contraction fears

The UK’s service sector, which makes up over 70 per cent of the economy, stagnated in May, the ONS said. Meanwhile the production sector “partially recovered”.

“The deteriorating picture across the UK’s service industries is of particular concern,” said Yael Selfin, chief economist at KPMG UK.

“Financial services output has now been contracting for 15 consecutive months, with Brexit likely to inflict permanent damage on the sector’s growth prospects,” she said. 

Paul Dales, chief UK economist at Capital Economics, said despite today’s figures “it looks as though the economy contracted by around 0.1 per cent quarter on quarter in the second quarter”.

“Although before today’s release we had expected a 0.2 per cent quarter-on-quarter fall,” he said. The ONS is due to release official second-quarter GDP figures next month.

Dales said: “Momentum has been lost in all sectors since earlier in the year.” Yet he said: “We don’t think we’re heading for a recession as GDP will probably rise in the third quarter.”

Suren Thiru, head of economics at the British Chambers of Commerce (BCC), said more must be done “to boost the UK’s growth trajectory by delivering the transformative infrastructure projects needed to secure the UK’s economic future”.

“The UK economy is faltering under the weight of relentless Brexit uncertainty and tougher global economic conditions,” he said.

Chief investment officer at financial services group Sanlam, Phil Smeaton, said that “while job growth remains robust, GDP performance is underwhelming as we see the pre-Brexit stock building boost starting to wear off”.

Read more: UK construction sector suffers worst output in 10 years

“Market indicators are giving cause for concern and investor optimism is experiencing a wobble,” he said.