The already remote prospects of an interest rate rise from the Bank of England this year have all but disappeared after a recession in manufacturing and the biggest slump in construction output in three years slowed the UK economy by more than expected in the third quarter of 2015.

City analysts said news that the economy’s rate of expansion eased to 0.5%, from 0.7% in the previous quarter, had ruled out an increase in the cost of borrowing until the spring or summer of next year.

The first stab at estimating gross domestic product from the Office for National Statistics highlighted Britain’s two-speed economy, with growth entirely due to increased activity in the dominant service sector. Construction output fell by more than 2% while industry contracted for a third successive quarter.

The data represents a blow to George Osborne’s much-trumpeted “March of the makers” and suggests any increase in interest rates, from their record low of 0.5%, are unlikely until 2016.



However, the GDP increase in the three months from July to September marked the 11th consecutive quarter of growth even if it represented a decline on the previous quarter. Most economists had been forecasting growth of 0.6%.

Chris Williamson, chief economist at economic pollsters Markit, said: “The third quarter slowdown, and warning lights from recent business surveys about the weakness intensifying in September, suggests that policymakers will want more time to assess the extent of the slowdown as we move into the fourth quarter, effectively postponing any rate hikes until next year.”

Sterling was left unmoved by the news.

Richard de Meo, managing director at foreign exchange firm Foenix Partners, said the dip in growth was “not enough to disrupt market expectations for interest rate hikes in mid-2016”.

The economy is still largely reliant on the services sector, which gave its best performance in nearly a year with growth of 0.7%. This was driven by a pick-up in the business services and finance sector, which posted an increase of 1%.

This contrasts with the continued woes of manufacturers, in particular steelmakers, and construction firms. Britain’s building sector shrank by 2.2%, partly because of unusually wet weather in August, while factory output dropped by 0.3%. Manufacturing has been declining for three quarters in a row, marking the seventh recession in the sector since 1997.

Industry has been affected by cooling global demand – especially from China and other emerging markets – which has been exacerbated by the strong pound. Steel production slumped 7.1% in the third quarter, even before the closure of the Redcar steelworks in north-east England was announced.

Frances O’Grady, the TUC general secretary, rebuked George Osborne for failing to protect Britain’s steel industry, and called for a “proper industrial strategy” to rebalance the economy.

David Kern, chief economist at the British Chamber of Commerce, said: “Our economic growth remains unbalanced ... The trade deficit also widened in this quarter, and we are still heavily reliant on consumer spending.

“Nevertheless, it is good news that real GDP is now 6.4% higher than the pre-recession peak in early 2008. What we need now is further measures to boost growth to support the recovery, with particular emphasis on exports and infrastructure investments.”

Overall industrial output was boosted by strong mining output after tax changes, and a bounce in oil production, as there were fewer maintenance shutdowns than in previous years, but production growth more than halved to 0.3% from 0.7% in the previous quarter. Agriculture grew by 0.5%.

GDP and main components. Photograph: Office for National Statistics

Commenting on the figures, the chancellor said the UK economy continued to outperform other large economies but that Britain must “live within our means”.

GDP is 0.5%. UK continues to outperform other major economies. But global risks mean we go on with tough decisions to live within our means — George Osborne (@George_Osborne) October 27, 2015

This is the first official snapshot of economic growth for the quarter and could be subject to revisions in the months ahead. Many economists believe the slowdown is only temporary.



Chris Hare, economist at investment bank Investec, noted that data from the construction industry tended to be volatile. “So looking ahead to the fourth quarter, we expect growth to start edging up again, closer to the 0.7% mark as the third-quarter construction drag goes away, manufacturing growth regains some poise and service sector output growth remains firm.”

Zach Witton, deputy chief economist at EEF, the manufacturers’ organisation, said: “The news wasn’t wholly negative, with bright spots including transport equipment doing well thanks to a backlog of aircraft orders and manufacturers still maintain some, albeit muted, confidence about their longer-term business prospects.”

Jeremy Cook, chief economist at World First, the international payments company, said: “The Bank of England has remained pretty sanguine about the impact on the UK economy of the emerging market rolling over but today’s number will keep the monetary policy committee from doing anything this year.”

Azad Zangana, an economist at fund manager Schroders, predicted a May 2016 move: “The slowdown in UK growth is by no means a disaster, but it will put pressure on the Bank of England to delay the first rate hike, especially as inflation remains in negative territory.”



GDP components. Photograph: Office for National Statistics

• An alert to this story said the UK economy had “contracted”. That should have read “slowed”.