UK recovery loses steam as construction drops

Britain’s economic recovery slowed more than expected in the three months to September after a slump in construction, raising the prospect that more than two years of relatively rapid economic growth is coming to an end.

The figures are closely watched here because the recovery in demand in the UK, allied to the weakness of the euro against sterling in the past year, has done much to boost Irish exports into a key market for both small and large Irish firms.

The economy grew 0.5% in the third quarter, official figures showed yesterday, a respectable rate by UK historic standards but below the 0.7% seen in the second quarter and economists’ expectations for the third.

Year-on-year growth fell to a two-year low of 2.3%, after recording its fastest growth since 2005 last year at 2.9%, outstripping all other major advanced economies.

Earlier this month the IMF forecast growth for 2015 overall would slow to 2.5 percent. That would still be faster than most developed nations and around Britain’s historic average.

Many economists viewed Tuesday’s figures as consistent with this type of modest slowdown, rather than heralding a sharper contraction linked to China’s stock market turmoil. The financial markets’ reaction to the data was muted.

Conall Mac Coille, chief economist at Davy Stockbrokers, said that UK construction output had fallen, led by a drop in repair and maintenance components, but that the sector may start growing again.

Meanwhile, services output is strong, while UK manufacturing fell again as the strength of sterling hurt UK exports, he added. Sterling dropped 0.2% to $1.5321 in London trading, and was trading at 72.10 pence per euro.

“The UK economy’s momentum has begun to ease in light of increasing uncertainty and a weaker global environment, as we expected, but remains decent,” Barclays economists said.

Growth was almost entirely driven by Britain’s dominant services sector, which picked up pace from the second quarter, while manufacturing shrank for a third quarter in a row and construction suffered its biggest contraction in three years.

Britain’s economy as a whole is now more than 6% larger than before the financial crisis, but neither the manufacturing nor the construction sectors have returned to pre-crisis levels of activity.

Moreover, some private-sector data have suggested the economy is facing stronger headwinds in the final three months of the year, particularly export-focused sectors vulnerable to sterling’s strength.

The Confederation of British Industry reported the biggest quarterly fall in factory orders for three years on Monday in the three months to October. That said, the outsize fall in construction output this quarter, which statisticians partly blamed on a wet August, left some economists hopeful GDP could be revised up.

The Bank of England has forecast that after revisions third-quarter GDP growth will creep up to 0.6%. It will publish new economic forecasts next week.

BoE policymakers are unlikely to rush into raising interest rates from their record-low 0.5%. Governor Mark Carney has said a decision will come into sharper focus at the turn of the year.

A Reuters poll on Monday showed economists had pushed back their forecasts for a hike to the second quarter of next year.