One of the UK’s leading economic thinktanks has slashed its forecasts for 2018 following evidence that growth almost came to a halt in the first three months of the year.
The National Institute for Economic and Social Research said it expected expansion of 1.4% in 2018 – down from the 1.9% it had been predicting three months ago – and anticipated that interest rates would not rise until August at the earliest.
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The NIESR economist Amit Kara said the “significant” downward revision was the result of official figures showing the economy grew by only 0.1% in the first three months of the year – well below the 0.5% the thinktank had been forecasting.
“It is not clear if this is just a soft patch or the start of a prolonged period of weakness” Kara said, although he added that NIESR believed growth would pick up to average around 0.4% in each of the next three quarters.
With the latest snapshot of the UK service sector pointing to only a modest recovery in April from the weather-related dip in activity in March, NIESR predicted the Bank of England would delay the next rise in interest rates until August and then only move if the economy was growing at 0.4%-0.5% a quarter.
Services firms reported the third lowest level of business activity since the EU referendum in 2016 to defy City economists, who expected a stronger recovery from the cold weather in March.
Firms that sell services to consumers were the worst affected, notably hotels and restaurants. The strongest expansion was in financial services.
The balance of responses from firms across the sector left the Chartered Institute of Purchasing and Supply/IHS Markit purchasing managers index (PMI) at 53.2, up from 51.9 in March, but much lower than the 54.2 in February. A figure above 50 indicates expansion.
Chris Williamson, the chief business economist at IHS Markit, said: “Services growth accelerated but, after March’s low, was the second-weakest for over one and a half years.
“The weak services data follows news that manufacturing lost further momentum in April, with output rising at the second-slowest rate for just over a year. The brightest news came from the construction sector, which saw the largest monthly output rise since November, albeit after an especially sharp decline in March.”
Paul Hollingsworth, a senior UK economist at Capital Economics, said the weakness of the rebound in April would “do little to assuage fears that the economy has suffered a loss of underlying momentum and makes the chances of a rate hike next week extremely slim”.
Threadneedle Street policymakers are scheduled to meet on 10 May to judge the state of the economy and decide whether to increase interest rates for only the second time since the 2008 financial crash.
Several members of the central bank’s rate-setting committee indicated in the early part of the year that they were ready to increase the cost of borrowing and several mortgage lenders raised the cost of their two-year fixed rates loans in response.
However, the likelihood of a rise has receded after a series of weak economic indicators, forcing lenders to revise their outlook.
IHS Markit PMI, which covers about 40% of the services sector and excludes high street shops, found the rate of employment growth, sales and investment was hit by uncertainty about the economic outlook as well as sluggish domestic demand from among consumers.
It said optimism about the next 12 months had increased, though. “The balance of companies expecting a rise in business activity over the year ahead reached its highest level since January. This was attributed to forthcoming product launches, new marketing plans and discounting strategies,” it said.
NIESR predicted the UK’s growth rate would recover to 1.7% in 2019 and 1.8% in 2020, provided the eventual Brexit deal guaranteed a high level of access for goods and services exports to the EU.