Luke warm first-quarter growth a blip as cheap oil benefit ‘yet to come’

Britain grew by a meagre 0.3 per cent in the first three months of this year despite the tailwind of a halving in the oil price, raising concerns that the economy may be suffering a fundamental slowdown.

However, Martin Weale claimed in The Times that there was little cause for concern. “This does not make me question whether the boost will come at all,” he said. “Both the monetary policy committee’s analysis and my own profile suggest that nearly all of the impact is yet to come.”

Official figures next week are likely to revise up first-quarter growth to 0.4 per cent, which would still be below long-term trends of about 0.6 per cent. The Bank is forecasting growth of 2.5 per cent for the full year.

Mr Weale, who had been voting for an interest rate rise until January, when it became clear that the oil price collapse would drive down inflation, also warned that prices could end up being lower for longer than expected. However, he said rate-setters were right to look through the temporary effect.
He was speaking soon after Britain officially dropped into deflation for the first time in 55 years, with the consumer prices index tumbling to -0.1 per cent last month.

“The committee is quite right to let the short-term effects of external shocks feed into inflation,” Mr Weale said in a speech in London.

“To do otherwise, and tighten or loosen aggressively, would do little to help inflation in the short term, but would risk a lot with unwanted gyrations in output. This would — with good reason — be highly unpopular with the public.

“By early 2017 I believe the effect will have faded. So the best response is not to worry about this risk should it materialise. After all, policy is set now in order to deliver inflation at target in two years’ time, by which time the effect is likely to have gone.”

However, he said that there was a “downside risk” to the Bank’s most recent forecast of inflation of 1.6 per cent by the end of next year.

Britain’s factories continued to grow slowly this month, helped by an improvement in export orders. The CBI’s May industrial trends survey found that growth in output volumes improved from April’s 22-month low, “but remained relatively modest”.

Rain Newton-Smith, the CBI’s director of economics, said: “Things are looking up for our manufacturers, with growth continuing and export orders improving. Some of this could be down to an improvement in the eurozone’s momentum, but the strengthening pound is still proving quite a challenge.”

About 34 per cent of 501 manufacturers surveyed said that the volume of output over the past three months was up and 25 per cent said that it was down, giving a balance of +9, above April’s +4 reading and the average of +3.

However, total orders disappointed, falling to -5, the lowest since October last year. The weakness was in the domestic market, as export orders came in at -7, the best level since last August.

The HSBC/Markit Purchasing Managers’ Index measure of activity read 49.1 for May, below the 50 mark that separates growth and contraction. Economists polled by Reuters had forecast a reading of 49.3, slightly stronger than the 48.9 reading for last month.

Annabel Fiddes, an economist at Markit, said: “Softer client demand — both at home and abroad, along with further job cuts — indicates that the sector may find it difficult to expand, at least in the near-term, as companies tempered production plans in line with weaker demand conditions.”

Data published last month indicated that the Chinese economy grew at an annual pace of 7 per cent in the first quarter of the year, down from 7.3 per cent in the previous three months and the slowest pace in six years.