The chances of the government hitting its growth forecast for 2015 has receded after official figures showed the economy performing less well than originally thought in the first three-quarters of the year.
In a second pre-Christmas setback for George Osborne, the Office for National Statistics on Wednesday cut its estimates for expansion in both the second and third quarters.
The ONS originally said growth in the three months to September was 0.5%, but said new data showing a sharper slowdown in the UK’s dominant service sector had resulted in the estimate being cut to 0.4%.
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With growth in the second quarter also revised down – from 0.7% to 0.5% – the annual rise in GDP in the year to the end of September has been trimmed from 2.3% to 2.1%.
The Office for Budget Responsibility – the body that produces forecasts for the Treasury – said in last month’s autumn statement that the economy would grow by 2.4% in 2015 as a whole. City economists said that now looked unlikely.
News of the GDP slowdown followed Tuesday’s ONS figures, which cast doubt on whether the chancellor would be able to meet his deficit-reduction target for the 2015-16 financial year. The government borrowed 10% more in November 2015 than it did in the same month of 2014 and in the first eight months of the year borrowed almost £67bn, only £2bn less than the forecast for the year as a whole.
Martin Beck, senior economic adviser to the EY ITEM Club said: “The revisions to the GDP data mean that 2015 looks set to be a relatively disappointing year for the UK economy. GDP is likely to grow by just 0.6% in Q4, which would leave growth in 2015 as a whole at 2.2%. Given the extent to which the economy has benefitted from very low inflation and the degree of spare capacity, this should really have been a year where the economy grew in excess of 3%.”
A breakdown of the GDP figures for the ONS showed that expansion remained unbalanced in the third quarter. Activity was boosted by strong household spending, but a deterioration in the UK’s trade performance subtracted one percentage point from growth.
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Separate ONS figures reported that the UK had a balance of payments deficit of £17.5bn in the third quarter of the year, identical to the shortfall in the second quarter. The ONS said a gloomier picture for trade had been offset by better news from investment income, where the deficit halved from £6.6bn to £3.3bn.
Kallum Pickering, senior UK economist at Berenberg, said the economy had ended 2015 on a “sour note”. He added that it was “clear that the pace of expansion has eased considerably. Undoubtedly, weaker global growth due to the slowdown in China and the EM rout has been a significant drag on growth this year. However, thanks to strong domestic demand the UK has managed to stave off the worst of it.”
The Treasury said: “We should be clear, as the IMF said earlier this month our recent economic performance has been strong. The UK was the fastest growing economy in the G7 last year, we’re leading the pack with the US this year, we have a record high employment rate and the deficit is down.
“Today’s figures highlight that risks remain – that’s why we should continue working through our plan to build an economy that delivers security for working people.”
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