UK economy grows by 0.3% as service sector slows

The UK economy grew by just 0.3% at the start of the year, the slowest growth rate since the first three months of 2016, according to official figures.

The Office for National Statistics said that the slower pace in the January-to-March period was due mainly to the service sector, which sank to 0.3% growth against 0.8% at the end of 2016.

In the last quarter of 2016, gross domestic product increased by 0.7%.

Friday's figure is a first estimate and could be revised in the coming months.

Economists had been expecting GDP growth to slow as consumers reined back spending in the face of rising inflation, but they had pencilled in a higher figure of 0.4%.

Chris Williamson, chief economist, IHS Markit, said: "The message is clear: the start of the year saw the weakest pace of growth for a year as rising prices have started to hit household spending."

The main drag on the service industry, which accounts for about 78% of the UK economy, came from the hotels, restaurants and the distributions sector, which fell by 0.5%, as increasing prices from rising inflation applied the brakes to retail trade,

The ONS said that output in the construction sector was also dragging on GDP after expanding by 0.2% in the first three months of the year following 1% growth in the fourth quarter of 2016.

Industrial production expanded by 0.3% over the period, with manufacturing increasing by 0.5% thanks to a jump in motor vehicle output, while agriculture growth eased to 0.3% in the first quarter from 1% in the final quarter of 2016.

'Caution and uncertainty'

Consumers have been feeling the pinch since the beginning of 2017, with inflation sitting at its joint highest level for more than three years at 2.3% in March.

The squeeze on household spending power has led to weaker retail sales, which recorded their biggest fall for seven years in the three months to March.

Nancy Curtin, chief investment officer at Close Brothers Asset Management, said the data would add to uncertainties.

"With the General Election just around the corner and Brexit negotiations afoot, any dip in the economy risks bringing further caution and uncertainty to businesses, which has a knock-on effect when it comes to investment and employment.

"However the chancellor, with better than expected Budget tax receipts in his pocket, has room for manoeuvre and should be able to pre-empt any further slowdown which should help with business confidence," she said.

Suren Thiru, head of economics at the British Chambers of Commerce, said the data confirmed his group's own survey that businesses were starting to feel the pressure.

"It is increasingly likely that the slowdown in the first quarter is the start of a sustained period of more sluggish growth. Inflation is expected to continue to rise, increasing the squeeze on consumer spending power and firm's profit margins, pushing growth lower," he said.

'Forging ahead'

Despite the service sector slowdown, other economists pointed to more positive signs.

Lee Hopley, chief economist at EEF the manufacturers' group, that "even with the pace of expansion dropping, we shouldn't be too hasty in dialling up the despair about the outlook for the UK economy.

"There are clearer signs that the consumer is wavering as inflationary pressures have picked up, but the production related sectors of the economy are forging ahead thanks to an improving global picture and the more competitive pound.

"Manufacturing also saw another solid quarter with output increasing by 0.5% and official data indicating that this positive trend was fairly broad based across sub-sectors."

The caution among consumers was underlined on Friday in separate figures from the British Bankers' Association. These showed British banks approved the fewest mortgages in four months in March and consumer credit growth slowed.

Banks approved 41,061 mortgages for house purchase last month, down from 42,247 in February, the BBA said. Annual consumer lending growth slowed to 6.1% from 6.5% in February, easing further from October's 10-year high of 7.2%.

By Andy Verity, economics correspondent

On the face of it today's preliminary growth estimate is unadulterated bad news. The slowdown was especially sharp in services - the sector that represents four fifths of the economy.

Within that sector, it was retail slamming on the brakes. Normally, fuelled by cheap consumer debt, retail spending is the accelerator.

If you're a pessimist, this is proof that the gloomy Brexit predictions are coming true. The drop in the pound drove up the cost of imports and that's feeding through to rising inflation (latest figure is 2.3%). Compare that with pay rises (latest figure is 2.2%). The squeeze on living standards is back and so is the tight-fisted consumer.

If you're an optimist though, it's only the worst growth since "early 2016". As a shocking statistic, that's pretty underwhelming. And we've been told for years that the sickness that caused the economic crash was an imbalance - an over-reliance on consumer spending and an under-reliance on productive industry. Now, manufacturing is growing, with the automobile sector - stimulated by a weak pound - driving it. To a pessimist, the weak pound is a sickness. To an optimist it's the cure.