UK economic growth weakest for nearly two years

The prospect of another British interest rate rise diminished further today with figures showing the weakest economic growth in the UK for nearly two years.

Economists said rates were likely to stay on hold for now after data from the Office for National Statistics showed gross domestic product rose by 0.5% in the first quarter of the year.

The figure, revised down from last month’s estimate of 0.6%, was the weakest since the second quarter of 2003, when it declined to 0.4%.

Although service industries increased their output during the quarter by 0.8%, the volume of output in production industries dropped by 0.7%, with manufacturing also falling 0.7%.

Falling retail sales and other downbeat economic news have already prompted some economists to abandon predictions of a further interest rate rise.

Simon Rubinsohn at stockbroker Gerrard said the downward revision in the figures to 0.5% had been widely expected.

The latest data highlighted the threats to the economy and the increased possibility of a rate cut, he said.

He said he believed the figures were unlikely to panic the Bank of England’s Monetary Policy Committee into slashing rates quickly.

“Base rates are likely to remain on hold for the time being,” Mr Rubinsohn said.

Andrij Halushka at the Centre for Economics and Business Research said the numbers increased the impression that interest rates in the UK had reached their peak.

Chief UK economist at Capital Economics Jonathan Loynes said the figures cast further doubt over Chancellor Gordon Brown’s forecast that GDP would expand by 3% again this year.

“We continue to expect growth of around 2% this year, which means taxes are going up next year and interest rates are coming down later this year,” he said.

John Butler at HSBC said the data showed the slowdown in the UK domestic economy had been more abrupt than the downturn in global demand.

“The mix of growth illustrates the vulnerability of the UK economy going forward,” he said.

“If consumer spending slows, which part of the economy will pick up the growth baton?

“Overall, this is a disappointing number, but the key is whether this was an aberration or a new trend.”

Philip Shaw at Investec said: “We do not see the MPC rushing out to cut rates.

“However, we still envisage an easing early next year, with the risk of a reduction this side of Christmas.”