UK economy grows at slowest pace in 3 years in Q1

LONDON - Britain's economy grew at its slowest pace in three years in the first quarter as surprisingly strong household spending failed to offset weaker industrial output and a sharp fall in business investment.

By (Reuters)

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Published: Fri 23 May 2008, 5:33 PM

Last updated: Sun 5 Apr 2015, 1:39 PM

The figures back up a plethora of evidence pointing to a slowdown as the credit crunch impact starts to spread from the hard-hit financial sector, but markets expect the Bank of England to hold fire on any more interest rate cuts this year.

The Office for National Statistics confirmed on Friday that the economy grew an unrevised 0.4 percent in the first three months of the year, leaving the annual rate at 2.5 percent.

Analysts had not expected a revision and there was little market reaction. Despite slowing growth, inflation is rising well above the 2 percent target and investors are betting the next move in rates could be up.

However, strong price pressures are expected to eventually subside as the economy weakens and BoE Governor Mervyn King has indicated the economy could suffer the odd quarter or two of contraction.

"The BoE will tread extremely carefully on the interest rate path for the time being," said Howard Archer, an economist at Global Insight.

Consumer strength

A breakdown of the data showed a strong recovery in household spending, which rose 1.3 percent on the quarter, up from 0.1 percent in the last quarter of 2007. This reflected strength in official retail sales data which has diverged from weaker survey and anecdotal evidence.

The statistics office said spending has also been boosted by strong car sales and demand for lottery tickets due to an unusually big jackpot.

"We don't trust the supposed surge in consumption over the quarter so the second quarter looks like it is going to reveal a further slowdown in the economy," said Philip Shaw, an economist at Investec.

However, some economists are starting to wonder if the official statisticians may have actually got the robust state of consumer spending right.

"It may not sit comfortably with our understanding of the fundamentals for consumer spending, but the strength in spending through the early phase of the credit crunch is increasingly hard to dismiss," said Malcolm Barr at JP Morgan.

The broad picture was much weaker, however, with services growth and production activity both revised lower. The services sector grew 0.5 percent on the quarter, its weakest performance in three years.

Gross fixed capital formation, a measure of business investment, fell by 1.6 percent on the quarter, its biggest drop in five years. That reflected a sharp fall in commercial building and homebuilding as the property market weakened.

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