UK to miss growth targets as economy slows

Tuesday, July 26, 2011

UK to miss growth targets as economy slows

UK economic growth forecasts of 1.7% now look unrealistic, economists warn

A slowdown in Britain's growth in the second quarter means that the economy is weaker than thought and has no chance of meeting its official growth target this year.

The eagerly awaited preliminary GDP estimate for April to June showed the economy growing by 0.2%, rather than contracting. Although this was better than some of the gloomier forecasts, it is still slower than the 0.5% growth seen in the first quarter, which came after a 0.5% decline in the fourth quarter of last year. City economists and thinktanks warned that the Office for Budget Responsibility would have to revise down its 1.7% growth forecast for this year.

Will Straw, associate director of Institute for Public Policy Research (IPPR), estimates the UK will grow by just 1.2% this year.

The weak growth is fuelling fears that Britain could lose its AAA credit rating unless the economy picks up sharply in the third quarter.

The Office for National Statistics (ONS) attributed some of the weakening in growth to a range of one-off events: the royal wedding, the additional bank holiday, the unusually warm April and also the impact of the Japanese tsunami on global supply chains.

ONS chief economist Joe Grice said taken together, these factors knocked 0.5% off GDP growth in the second quarter. He added that the economy's underlying growth rate was higher than 0.2%.

The service industries, which account for three-quarters of the economy, grew by 0.5%, as did the construction sector. But the production industries shrank by 1.4%. Most of that was down to a 3.2% fall in electricity and gas output due to warm weather in April, while manufacturing, which was hit by the knock-on effects of the Japanese tsunami, dropped by 0.3%. Hotels and restaurants benefited from the April heatwave and the royal wedding ? growing by 2.2%.

George Osborne welcomed the figures. "The positive news is that the British economy is continuing to grow and is creating jobs," the chancellor said. "And it is positive news too that at a time of real international instability we are a safe haven in the storm. Our economy is stable at this time because this government has taken the difficult decisions to get to grips with Britain's debts. Abandoning that now, as some argue we should, would only risk British jobs and growth."

However, Ed Balls, the shadow chancellor, said the figures were "deeply worrying" and a sign that the economy is flatlining in the face of a global hurricane. "When there is a hurricane you do not rip the foundations out of your own house. That is exactly what George Osborne has done," Balls told the BBC.

In his official response, he accused the chancellor of being "in total denial". "Families, pensioners and businesses can feel that tax rises and spending cuts which go too far and too fast are hurting, but it's increasingly clear that they aren't working," Balls said. "It's now almost certain that George Osborne's growth forecasts will be revised down for a fourth time, which will mean government borrowing is revised up once again."

The "meagre and pathetic" growth figure also sparked fresh calls for an economic plan B from Unite, Britain's largest union.

Unite general secretary Len McCluskey said: "With every passing month, it is becoming clearer and clearer that the government's monetarist and fiscal policies are not delivering the level of growth necessary for the British economy to recover. It is complacent of ministers to blame global economic problems for the bad figures. What we need to remember is that Britain stayed out the eurozone to give it more freedom of economic action ? many of the problems we face are homegrown and can be laid directly at the door of George Osborne.

"It is interesting to note the reports that there is rising tension between David Cameron and George Osborne about growth strategy ? it is dawning on the prime minister that his friend is no economic genius."

Julia Kollewe

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