Manufacturing pushes up economic growth

Britain's economic growth outpaced initial estimates in the first quarter thanks to unexpectedly high industrial output, despite the drag from the January cold snap and rising VAT.

But economists warn that the eurozone debt crisis and the looming government spending cuts make for a bumpy road ahead.

Gross domestic product (GDP) rose by 0.3 per cent in the three months to the end of March, a better performance than the 0.2 per cent preliminary estimate, the Office of National Statistics (ONS) said yesterday.

The upwards revision in the official statistics was broadly expected after industrial performance figures published by the CBI last week showed manufacturing exports moving into positive territory for the first time in two years, pushing overall economic output up by 2.3 per cent in March, the biggest monthly rise since July 2002.

Sure enough, the industrial sector showed the biggest improvement in the ONS report, with output rising by 1.2 per cent in the first quarter, compared with 0.4 per cent in the three months to the end of December. Within that, manufacturing output rose by 1.2 per cent, compared with 0.8 per cent in the fourth quarter of 2009. But despite the improvements, overall GDP growth is still below the 0.4 per cent growth registered in the last quarter of 2009. GDP is 0.2 per cent lower than the same quarter of the previous year, compared with the 0.3 per cent year-on-year drop recorded in the final quarter of 2009.

In the manufacturing sector, the ONS report was claimed as evidence of Britain's export-led recovery and shift away from a reliance on financial services. "The recovery and rebalancing of the economy now looks to be underway," Lee Hopley, the chief economist at the manufacturers' group the EEF, said yesterday.

Elsewhere in the economy, the picture is less rosy. The service sector grew by just 0.2 per cent in the first quarter, according to the ONS, down from the 0.5 per cent registered in the previous quarter. Construction output fell by 0.5 per cent; and hotels, distribution and catering by 0.7 per cent. Household expenditure remained flat, running at 0.5 per cent lower than in the same quarter of last year, while government spending rose by 0.5 per cent, and is 3.1 per cent higher year on year.

A proportion of the sluggish performance can be put down to the combination of the bad weather at the start of the year, and VAT going back up to 17.5 per cent on 1 January.

But some of the economic activity – in the hotel and catering sector, for example – may be gone for good, according to Howard Archer, the chief European economist at IHS Global Insight.

And the longer-term prognosis for the economy also remains uncertain. At home, the economy faces the drag of sharp public spending cuts, while the eurozone crisis also threatens to squeeze British export growth and raise the pressure for fiscal tightening across Europe.

"We expect recovery to develop only gradually in the face of major headwinds, including the pressure on consumers coming from high unemployment, falling employment, muted wage growth, high debt levels and looming major fiscal tightening," Mr Archer said.