UK GDP: Service sector slowdown drags on recovery hopes

GDP expanded by 0.7% in the three months to September,down from the second quarter’s 0.9% growth

George Osborne says that an independent Scotland could not join a formal currency union (Getty Images)

Slower growth in the dominant services sector sapped the recovery’s momentum in the latest quarter, according to official figures today.

GDP expanded by 0.7 per cent in the three months to September, said the Office for National Statistics, down from the second quarter’s 0.9 per cent growth.

Services in the three months grew by 0.7 per cent, down from 1.1 per cent previously. The rate of growth of the smaller construction and production sectors stepped up slightly in the quarter.

The softer GDP figure was in line with City expectations and helped push the pound up a quarter of a cent to $1.6052 in morning trade.

The reaction of analysts was generally positive. “With easing inflation providing a timely boost to real incomes, firms’ employment and investment intentions still strong and private-sector balance sheets in improved health, the recovery seems unlikely to suddenly stall,” said Samuel Tombs of Capital Economics.

But some analysts cautioned that the British economy is still vulnerable to a continued deterioration in the eurozone, which accounts for close to a half of all our trade, over the coming months.

They added that if the slowdown goes on the Bank of England will probably be forced to delay its first interest rate rise further into next year.

“If the mixed data continue to roll in, and if the eurozone shows no signs of renewed growth, this could push back rate hikes, perhaps beyond next year’s general election,” said Rob Carnell of ING.

Financial markets are pricing in the first quarter-point increase in the Bank’s 0.5 per cent base rate to occur in August next year, well after the General Election next May.

The Bank’s nine-member rate-setting monetary policy committee voted by a margin of seven to two to keep rates on hold earlier this month, with the latest minutes showing most members were concerned about the potential impact of recent steep declines in global equity markets on the recovery.

The ONS estimated construction output grew by 0.8 per cent in the quarter, up from 0.7 per cent in the three months to June. Production grew by 0.5 per cent, up from 0.2 per cent, largely on the back of a 6.5 per cent surge in energy supply.

However, the growth rate in manufacturing slipped down to 0.4 per cent from 0.5 per cent previously. Analysts said this probably reflected weaker export demand from the eurozone.

Within services the growth rate of the hotels and restaurants sector halved to 0.5 per cent.