British economy grows by 0.5%

The UK economy returned to modest growth in the first three months of 2011, official figures revealed today, following a shock decline at the end of last year.

Gross domestic product (GDP) – a broad measure for the total economy – grew by 0.5% in the first quarter of the year, following an unexpected drop of 0.5% in the final weather-hit quarter of 2010, the Office for National Statistics (ONS) said.

But the ONS warned that underlying growth – that is, assuming there was no displacement of activity from the fourth quarter into the first quarter – was broadly flat.

Today’s figure is a preliminary estimate and subject to revision.

Economists previously warned that growth of less than 1% in the first quarter would be disappointing and the lacklustre performance will raise serious concerns over the economy’s ability to withstand the coalition Government’s deficit-busting austerity measures.

The sluggish growth is likely to relieve pressure on policymakers at the Bank of England to raise interest rates in the face of soaring inflation.

Industrial production, which includes manufacturing, mining and utilities, grew by 0.4%, compared with a 0.8% increase in the previous quarter.

Within this category, manufacturing maintained growth of 1.1%, but mining and utilities dropped 0.4% and 3.5% respectively.

The biggest decline came from the construction sector, which decreased 4.7% in the quarter, compared with a 2.3% decrease in the previous quarter.

The powerhouse services sector – which makes up some 75.8% of the total economy - grew by 0.9%, compared to a decline of 0.6% in the previous quarter.

Within this category, business services and finance, up 1%, and transport, storage and communication, up 2.7%, made the largest contribution to growth.

The majority of the Bank of England’s Monetary Policy Committee (MPC), who voted in favour of holding interest rates at historic lows of 0.5% earlier this month, were waiting for today’s figures to get a clearer picture of how the economy has fared so far in 2011.

The Bank is struggling with weak growth and surging inflation, which at 4% is still double the Government’s target.

The mediocre performance in the first quarter makes a rate rise next month, which had been mooted by some economists, more unlikely. City analysts are now expecting an increase in either August or possibly November.