LONDON: The already remote prospects of an interest rate rise from the Bank of England this year have all but disappeared after a recession in manufacturing and the biggest slump in construction output in three years slowed the UK economy by more than expected in the third quarter of 2015.
City analysts said news that the economy’s rate of expansion eased to 0.5%, from 0.7% in the previous quarter, had ruled out an increase in the cost of borrowing until the spring or summer of next year.
The first stab at estimating gross domestic product from the Office for National Statistics highlighted Britain’s two-speed economy, with growth entirely due to increased activity in the dominant service sector. Construction output fell by more than 2% while industry contracted for a third successive quarter.
The data represents a blow to George Osborne’s much-trumpeted “March of the makers” and suggests any increase in interest rates, from their record low of 0.5%, are unlikely until 2016.
However, the GDP increase in the three months from July to September marked the 11th consecutive quarter of growth even if it represented a decline on the previous quarter. Most economists had been forecasting growth of 0.6%.
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Chris Williamson, chief economist at economic pollsters Markit, said: “The third quarter slowdown, and warning lights from recent business surveys about the weakness intensifying in September, suggests that policymakers will want more time to assess the extent of the slowdown as we move into the fourth quarter, effectively postponing any rate hikes until next year.”
Sterling was left unmoved by the news.
Richard de Meo, managing director at foreign exchange firm Foenix Partners, said the dip in growth was “not enough to disrupt market expectations for interest rate hikes in mid-2016”.
The economy is still largely reliant on the services sector, which gave its best performance in nearly a year with growth of 0.7%. This was driven by a pick-up in the business services and finance sector, which posted an increase of 1%.
This contrasts with the continued woes of manufacturers, in particular steelmakers, and construction firms. Britain’s building sector shrank by 2.2%, partly because of unusually wet weather in August, while factory output dropped by 0.3%. Manufacturing has been declining for three quarters in a row, marking the seventh recession in the sector since 1997.
