U.K. Economy May Be Heading for Its Worst Quarter Since 2012

  • GDP rose 0.3% in first quarter, according to Niesr estimates
  • Industrial production unexpectedly dropped in February

The U.K. economy may have grown at the slowest pace in more than three years in the first quarter, according to new estimates that could put a further cloud over the outlook.

The National Institute of Economic and Social Research estimated on Friday that gross domestic product rose 0.3 percent, half the pace recorded in the last three months of 2015. That would be the worst performance since the fourth quarter of 2012, which was the last time the economy shrank.

The institute published the estimate after data showed the trade gap widened to the most in eight years and there was an unexpected decline in industrial production. With question marks over the pace of global growth and domestic confidence taking a hit in the buildup to Britain’s European Union membership vote in June, the economy may be losing momentum.

The 0.3 percent drop in industrial output in February followed a 0.2 percent increase in January, smaller than initially reported. Based on the current figures, output would need to surge 3.1 percent in March just to come in flat for the quarter, according to the Office for National Statistics. Kallum Pickering, an economist at Berenberg in London, said the figures suggest downside risks to his first-quarter GDP forecast of 0.4 percent.

The ONS also said that the trade deficit in goods and services widened to 13.7 billion pounds ($19 billion) in the three months through February, the most since the first quarter of 2008.

“The weakest points of the U.K. economy just got weaker,” said Daniel Vernazza, an economist at UniCredit in London. “Heightened global uncertainty is likely to blame.”

Weak trade and manufacturing numbers in recent years have raised concerns about the U.K.’s imbalanced economy. The future of British industry is now under an even darker cloud after Tata Steel said it’s considering the sale of its unprofitable U.K. division, jeopardizing 40,000 jobs.

The ONS said manufacturing production fell an annual 1.8 percent in February, with basic iron and steel plunging 38 percent. Production of crude steel is at its lowest level since 2008.

With production weakening, it’s been left to services and consumer spending to drive the economy to 12 straight quarters of growth. Still, that side of the economy is not immune if confidence takes a hit because of uncertainty surrounding “Brexit.” Markit Economics said Tuesday that business confidence is “in the doldrums” and its surveys indicate expansion slowed to 0.4 percent in the first quarter.

“If a decision is taken to leave the EU it’s going to create enormous uncertainty,” former International Monetary Fund Chief Economist Olivier Blanchard said on Friday. “It is already starting but it will go on for a long time after the vote. The result of this will probably be a drop in investment by firms which will wait to know which way to go, how to take decisions.”

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