UK economy slows as global weakness, Brexit uncertainty weigh

UK economy slows as global weakness, Brexit uncertainty weigh

© Reinhard Krause / Reuters

LONDON (Reuters) - Britain's economy slowed at the start of this year, buffeted by a slowing global economy and uncertainty ahead of this year's referendum on European membership, as it relied solely on the services sector to drive growth.

First-quarter gross domestic product grew by 0.4 percent, down from 0.6 percent in the three months to December 2015 and in line with economists' forecasts of a 0.4 percent expansion, the Office for National Statistics said on Wednesday.

Economists were clear that the weak global economy and doubts about Britain's future in Europe had contributed to the slowdown.

"Given that the next quarter is also likely to see some pre-referendum jitters, it looks likely that Q2 will see a soft reading for GDP growth," said Martin Beck, economist from the EY ITEM Club consultancy.

The Organisation for Economic Co-operation and Development on Wednesday warned that Britain's large current account deficit could become harder to finance and sterling might slide if it votes to leave the EU.

Sterling climbed from a day's low against the dollar after the data came in no worse than expected by economists.

While the ONS said it had no evidence for or against a link between the slowdown and referendum uncertainty, business surveys suggest it is taking a toll on activity and investment.

The preliminary reading of gross domestic product does not include measures like investment and trade that would more readily reflect Brexit-related uncertainty, or a slowing global economy.

Output in the three months to March was 2.1 percent higher than a year earlier, matching the fourth quarter's growth rate that was also the weakest since the third quarter of 2013, but it was still slightly stronger than expected by economists.

The Bank of England has said that interpreting economic data in the run-up to the referendum is likely to be tricky but it has pointed to signs that uncertainty around the Brexit vote is weighing on business investment.

The soft outlook for the world economy, combined with a slowdown in British wage growth, has prompted economists to push back their bets on when the Bank of England will raise rates into next year.

Growth in the first quarter was driven solely by the services sector, which expanded 0.6 percent compared with the fourth quarter. By contrast, industrial and construction output declined 0.4 percent and 0.9 percent respectively.

Manufacturing and construction output suffered the steepest drops in annual terms since early 2013.

While consumer demand - a key pillar of British economic growth - has remained broadly solid, retail sales dropped at the joint-fastest rate in March since January 2014, adding to signs of a slowdown.

(Story refiles to fix headline).

(Editing by Andrew Heavens)