UK growth slows in Q1 as credit crunch bites

LONDON (Reuters) - Britain’s economy grew at its weakest rate in three years in the first quarter as the credit squeeze tightened its grip, data showed on Friday.

The Office for National Statistics said the economy grew 0.4 percent in the first three months of the year, down from 0.6 percent in the previous quarter and as high as 0.9 percent at the end of 2006.

The figures show Britain’s economy is now growing below trend, potentially giving the Bank of England more leeway to cut interest rates.

However, Bank policymakers have indicated some slowing of the economy is necessary to curb inflationary pressures and the figures did little to alter expectations that further rate cuts would be gradual.

“These data are unlikely to have been a surprise to the Monetary Policy Committee, for whom a cooling in the economy to below potential is required to take some of the heat out of inflation,” said Alan Clarke, a economist at BNP Paribas.

“Nonetheless, today’s numbers could yet be revised lower and the coming quarters are likely to be even worse.”

Britain is the first of the G7 group of industrial nations to report on its economic performance this year. The United States, teetering on recession, will report its Q1 GDP next Wednesday.

On an annual basis, growth eased to 2.5 percent in the first quarter from 2.8 percent in the final quarter of last year. This was slightly below the consensus forecast of 2.6 percent.


Most economists are predicting an even sharper slowdown in the months ahead.

The International Monetary Fund is forecasting growth of just 1.6 percent this year. If realised, this would be the weakest rate in more than a decade and significantly weaker than the government’s own forecasts.

The consensus forecast among private economists is for growth of 1.7 percent while the government is pencilling in a reading of around 2 percent.

Retail sales growth has held up surprisingly well this year according to official figures, but consumer morale has taken a dive and is likely to fall further if the downturn in the property market gathers pace.

“While overall growth has fallen from the heady rates of 2006-07, the decline thus far has been moderate,” said George Buckley, chief UK economist at Deutsche Bank.

“Weaker economic growth going forward seems likely.”

A breakdown of the figures showed a broad-based deceleration.

Service sector growth eased to 0.6 percent on the quarter from 0.7 percent in the final quarter of last year. Within that, growth in business services and finance slowed to 0.4 percent -- the weakest rate in almost five years.

There was an outright decline in industrial production, which fell 0.1 percent on the quarter as a sharp fall in energy output more than offset a recovery in manufacturing.

(Editing by Stephen Nisbet)

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