UK recovery stalling as construction plummets

Russell Lynch
27 Apr 2011

The worst slide for Britain's builders since the depths of the recession in 2009 pegged back the UK's fragile recovery in the first three months of this year, official figures showed today.

The eagerly anticipated estimate from the Office for National Statistics revealed 0.5% expansion for the UK, but a 4.7% dive for the construction industry in the first quarter knocked 0.3 percentage points off wider economic growth.

Despite bouncebacks for larger services and manufacturing firms, expanding 0.9% and 1.1%, the overall figures mean Britain's recovery is back where it started six months ago, as growth simply wiped out the shock 0.5% decline in the final quarter of last year.

Charles Davis, managing economist at the Centre for Economics and Business Research, warned that UK output was still languishing at levels seen five years ago and was 4% below its pre-recession peak in 2008 after effectively stalling over the past two quarters.

"The UK recovery still has a long way to go," he said.

The figure is well below the Office for Budget Responsibility's 0.8% forecast for the period and puts its prediction for 1.7% growth in 2011 overall under severe pressure.

Relief that even weaker growth failed to materialise helped the pound gain half a cent against the dollar to $1.6518, although markets do not expect the Bank of England to raise interest rates until November.

Barclays Capital economist Chris Crowe added: "For an economy that is supposed to be recovering from an unprecedented downturn, this is really a very poor result, particularly with the full impact of the government's austerity plans still to be felt."

But experts also questioned the steep fall for construction, coming against a snow-hit pre-Christmas period which brought the industry grinding to a halt. Ernst & Young Item Club economic adviser Andrew Goodwin said the numbers were "frankly bizarre", while the Construction Products Association said the "extremely surprising" figures came against a backdrop of strong industry surveys and exceptionally mild weather during the period.

The association expects industry output to fall this year and next, before finally returning to growth in 2013. The figures came as the London Chamber of Commerce and Industry also warned of "disappointing" trading by businesses in the capital this year.

Fewer than half of firms expect prospects to improve over the months ahead, compared with 53% three months ago, while businesses are more downbeat over growth and worried over inflation.

Deputy chief executive Peter Bishop said: "The first three months of the year were frankly a disappointment as companies in the capital endured lukewarm trading conditions."

Big business reactions to a weak quarter for the British economy...

Tom Haughey, chief executive of structural steel firm Severfield-Rowen: "The construction figures are quite alarming. We have said that there will be no substance to the recovery until 2012 and these numbers indicate that that view is just about right. We are seeing public spending being hit when private investment has not quite taken off yet, so it's a double whammy."

Rooney Anand, chief executive of Greene King: "There are a couple of positive signs in today's numbers and lately we've seen more job creation and inflation falling back, but the overall consumer outlook continues to be weak given the ongoing squeeze in household incomes from inflation and rising taxes. That said, there remain opportunities to grow by offering customers what they want such as a great meal out at very attractive prices."

Nick Hobson, chief executive of conveyor belt maker Fenners: "These manufacturing numbers don't reflect our experience. Our first-half profit rose far more than 1.1% because, as the manufacturing base in England has progressively declined over the last three decades, to remain competitive and profitable we've been forced to seek other markets abroad. Fenner now generates more than half its revenues from North America and Asia. We don't see any significant political commitment to manufacturing in the UK, and until that changes there's no great incentive for us to change our model."

Richard Solomons, current Chief Financial Officer and incoming CEO at InterContinental Hotels Group: "We are still seeing the positive trends from last year across the industry with demand rising as business travellers return in greater numbers and the leisure market continuing to be strong. Over the last few years London has been one of the most resilient tourism markets in the world and with the Royal Wedding, combined with the ongoing market recovery we expect that to continue."

Nigel Terrington, chief executive of buy-to-let lender Paragon: "There has been a bit more in the of business services activity going on, but overall it is not enough to support the level of recovery we would still like to see. Many of our biggest banks are still trying to reduce their balance sheets."