U.K. Economy Loses Pace as OECD Warns of Damage From Brexit

U.K. 1Q Growth Slows But Will Brexit Fears Weaken 2Q?
  • Services post weakest growth since second quarter of last year
  • OECD says best Brexit outcome worse than remaining in EU

The U.K. economy lost momentum in the first quarter as services posted their weakest performance for almost a year and industrial production continued to decline.

Economic growth slowed to 0.4 percent from 0.6 percent in the final three months of 2015, as forecast in a Bloomberg survey of economists. The estimate, published by the Office for National Statistics in London Wednesday, matched the weakest reading since the end of 2012. Gross domestic product rose 2.1 percent from a year earlier.

Twitter: George Osborne on Twitter

With less than two months to go before Britons decide whether to remain in the European Union, the figures may provide ammunition to both sides in the increasingly bitter debate. While those wanting to stay in the 28-nation bloc say that uncertainty is taking its toll, Brexit campaigners argue the slowdown reflects a period a global turmoil fueled by concerns over China.

The latest overview of the economy came as the Organization for Economic Cooperation and Development issued a warning about the potential fallout from Brexit, joining groups including the International Monetary Fund and the Bank of England. It said Britain would be hit by tighter financial conditions, weaker confidence, higher trade barriers and restrictions on labor mobility. The result would be an economy 5 percent smaller by 2030 compared with continued EU membership.

‘Win-Win’

“The best outcome under Brexit is still worse than remaining an EU member, whilst the worst outcomes are very bad indeed,” OECD Secretary-General Angel Gurria said in a speech in London. “Why would anyone want to give up this truly win-win proposal?”

The GDP figures underscore the lop-sidedness of Britain’s 13 consecutive quarters of expansion. Services, the largest part of the economy, expanded 0.6 percent, though the pace of growth slowed from 0.8 percent in the fourth quarter. Industrial production shrank for a second straight quarter, declining 0.4 percent on the back of weaker manufacturing and oil output, and construction declined 0.9 percent.

The slowdown in services was driven by business services and finance, which grew 0.3 percent in the first quarter -- less than half of the pace of the previous three months.

Rates Outlook

The U.S. will report its first-quarter growth estimate on Thursday -- a day after the latest Federal Reserve policy decision -- with economists predicting a slowdown to an annualized rate of 0.6 percent from 1.4 percent in the fourth quarter. On the same basis, the U.K. expanded 1.6 percent.

The pound was trading at $1.4580 as of 2:58 p.m. London time, little changed from Tuesday.

The BOE has said Brexit nerves are weighing on investment and hiring -- unemployment rose between December and February -- and economists increasingly expect policy makers to maintain the benchmark rate at a record-low 0.5 percent until next year. On Friday, Goldman Sachs Group Inc. pushed back its rate-increase forecast to the second quarter of 2017 from the fourth quarter of this year.

Provisional figures show that services grew 0.2 percent in March following a 0.1 percent gain in February. Industrial production jumped 1.9 percent after a 0.3 percent contraction the previous month. Construction fell 4.4 percent for a third month of decline.

Population Growth

While the economy as a whole returned to its pre-recession size in 2013, population growth meant that Britain remained poorer on a per capita measure until last year. GDP per head grew 0.2 percent in the first quarter, down from 0.4 percent in the fourth quarter.

The report released Wednesday is the first of three estimates from the ONS and may be revised as it’s based on about 44 percent of the information that will ultimately be available.  

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