Figures to reveal UK economic state

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The Independent Online

Critical figures released tomorrow will reveal whether the UK economy has rebounded from a shock decline and is tough enough to withstand the Government's severe spending cuts.

Economists expect gross domestic product (GDP) - a broad measure for the total economy - to have grown by anything from 0.2% to 1.2% in the three months to March following the surprise 0.5% contraction in the final quarter of 2010.

But analysts have warned anything less than 1% will be disappointing, and the figures are likely to show average growth over the last two quarters was broadly flat.

The figure, released by the Office for National Statistics, is subject to revision but will put the coalition Government's deficit-busting plans under the spotlight once again and will indicate if the economy is robust enough to withstand the fiscal squeeze.

Policy-makers at the Bank of England are awaiting the figures to help determine whether the economy is strong enough to withstand an interest rate hike, as inflation continues to sit well above the Government's 2% target.

The severe weather in December was blamed for the unexpected reversal in GDP in the three months to December, though activity would have been flat without the Arctic conditions.

The weakness raised doubts over the timing and size of Chancellor George Osborne's £81 billion package of spending cuts and the VAT hike from 17.5% to 20%.

Wednesday's figures are a preliminary estimate, which have been heavily revised in the past, and do not include the expenditure side to the economy.

But a weak period for the construction sector and industrial production, coupled with modest growth for the powerhouse services sector, means growth in the first quarter is likely to be muted.

Howard Archer, chief UK and European economist at IHS Global Insight, has forecast growth of 0.6% to 0.7%.

He said: "While at first glance this looks a decent performance, in actual fact it would represent a far from dynamic performance after weather-influenced contraction of 0.5% in the fourth quarter of 2010."

He added: "Just as the fourth quarter 2010 contraction overstated the economy's weakness, so will growth in the first quarter of 2011 highly likely overstate its strength."

The majority of the Bank of England's Monetary Policy Committee, who voted in favour of holding interest rates at historic lows of 0.5% earlier this month, want to see how the economy has fared before tightening monetary policy.

Chris Williamson, chief economist at Markit, said "only an especially strong GDP reading would risk tipping the heavily-split Bank of England's policymakers towards tightening in early May".

Mr Archer agreed, and said: "We doubt that first quarter GDP growth of 0.6% to 0.7% quarter-on-quarter would be sufficient to lead to the Bank of England raising interest rates at its May meeting.

"We believe that most members of the MPC would regard this as a pretty muted rebound after contraction of 0.5% quarter-on-quarter in the fourth quarter of 2010 and it would do little to ease their concerns and uncertainties over the underlying state of the economy."

Looking ahead, economists are now pencilling in a rate rise in either August or possibly November.

The economic picture will remain uncertain as the impact of the royal wedding and succession of bank holidays in April makes forecasting growth for the second quarter a challenge.

Samuel Tombs, economist at Capital Economics, said the extra day off work to mark the royal wedding could reduce GDP in the second quarter by a maximum of 1.5%.

Mr Tombs said the wedding would add to the "volatility of data" over the coming months.

Mr Osborne told Cabinet colleagues today that the UK economy was "on the right track".

At the weekly Cabinet meeting in 10 Downing Street, the Chancellor briefed colleagues on recent meetings at the IMF as well as the implications of various surveys on the economic position. But the impending GDP figures were not discussed, said a Downing Street spokeswoman.

She said: "He underlined the fact that we are on the right track. That is supported by the IMF, the OECD and the Bank of England's backing of the plans.

"We are roughly in the right place, but clearly it is still difficult.

"He looked at the various issues that are of concern to the IMF and also reassured the Cabinet that the IMF was stepping up in terms of things like better early warning and better advice to finance ministers."

The spokeswoman added: "We are dealing with a record deficit and huge debt, but if you look at the international picture, particularly the eurozone and also continued concern about the US debt picture, we are on the right track."

Angela Eagle, Labour's shadow chief secretary to the Treasury, said: "George Osborne's confident declaration that the recovery is on the right track should be taken with a pinch of salt, given his complacent claim last autumn that Britain was 'out of the danger zone'.

"Our economy should not just be making up all the lost ground from the end of last year but growing strongly on top of that. We will need to compare growth over the last six months, since George Osborne's spending review and VAT rise but before the bulk of the cuts have really kicked in, with growth of 1.8% over the previous six months.

"The Office for Budget Responsibility, which has already downgraded its forecast for 2011 three times, is predicting growth of just 0.8% in the first quarter. That would mean growth of just 0.3% over the last six months, which would be a very weak recovery indeed.

"Before George Osborne ripped up our plan to halve the deficit over four years, growth in 2011 was forecast by the OBR to be 2.6%. We will need to see very strong figures tomorrow if the Chancellor is to get back on to that track."