GDP estimate for third quarter cut from 0.5% to 0.4% after sharp slowdown in services, meaning UK chancellor is unlikely to hit growth forecasts

George Osborne has received a second pre-Christmas setback after official figures showing a a stuttering performance by the economy in the months following the general election put the government’s 2015 growth forecast at risk.

Following much worse than expected borrowing figures on Tuesday, the Office for National Statistics pared back its estimate for gross domestic product in the third quarter of the year - and said activity had also been weaker in the previous three months.

The ONS originally said growth in the three months to September was 0.5%, but said new data showing a sharper slowdown in the UK’s dominant service sector had resulted in the estimate being cut to 0.4%.



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With growth in the second quarter also revised down – from 0.7% to 0.5% – the annual rise in GDP in the year to the end of September has been trimmed from 2.3% to 2.1%.

The Office for Budget Responsibility – the body that produces forecasts for the Treasury – said in last month’s autumn statement that the economy would grow by 2.4% in 2015 as a whole. City economists said that now looked unlikely, pointing to the 0.1% expansion of service sector output in October - the first evidence of the level of activity in the fourth quarter - as a sign that the economy’s soft patch had continued.

The figures were seized upon by John McDonell, Labour’s shadow chancellor. “Today’s figures are worrying as they show that the recovery is fragile and unbalanced with many underlying structural problems that the chancellor still has failed to resolve,” McDonell said.

“George Osborne has to realise that he has no room for complacency with the manufacturing sector now in recession, and manufacturing output still lower than before the crash. It further shows that the so-called ‘march of the makers’ never left the Tory press release let alone the factory floor. With the trade balance worsening Osborne’s failure to boost manufacturing and rebalance the economy represents a risk to our future economic stability.”

The Treasury said: “We should be clear, as the IMF said earlier this month our recent economic performance has been strong. The UK was the fastest growing economy in the G7 last year, we’re leading the pack with the US this year, we have a record high employment rate and the deficit is down.

“Today’s figures highlight that risks remain – that’s why we should continue working through our plan to build an economy that delivers security for working people.”

In the City, the stock market shrugged off the growth figures, taking its cue instead from a strong pre-Christmas rally on Wall Street. London’s FTSE 100 index closed 158 points higher at 6,241.

News of the GDP slowdown followed Tuesday’s ONS figures, which cast doubt on whether the chancellor would be able to meet his deficit-reduction target for the 2015-16 financial year. The government borrowed 10% more in November 2015 than it did in the same month of 2014 and in the first eight months of the year borrowed almost £67bn, only £2bn less than the forecast for the year as a whole.

Martin Beck, senior economic adviser to the EY ITEM Club, said: “The revisions to the GDP data mean that 2015 looks set to be a relatively disappointing year for the UK economy. GDP is likely to grow by just 0.6% in Q4, which would leave growth in 2015 as a whole at 2.2%. Given the extent to which the economy has benefited from very low inflation and the degree of spare capacity, this should really have been a year where the economy grew in excess of 3%.”



A breakdown of the GDP figures for the ONS showed that expansion remained unbalanced in the third quarter. Activity was boosted by strong household spending, but a deterioration in the UK’s trade performance subtracted one percentage point from growth.



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Separate ONS figures reported that the UK had a balance of payments deficit of £17.5bn in the third quarter of the year, identical to the shortfall in the second quarter. The ONS said a gloomier picture for trade had been offset by better news from investment income, where the deficit halved from £6.6bn to £3.3bn.