Economic growth slides in wake of credit crunch

Apr 26 2008 by Iain Laing, The Journal

THE UK economy is growing at its slowest pace for three years as the credit crunch worsens, says new research.

The fresh evidence of a slowdown came as the economy grew by an estimated 0.4% in the first three months of 2008, according to the Office for National Statistics (ONS).

The performance is the most sluggish since the beginning of 2005 and represents the UK’s third successive quarter of slowing economic growth.

The annual growth rate also slowed to 2.5%, compared with 2.8% in the previous three months. Official Treasury growth forecasts suggest the economy will grow by between 1.75% and 2.25% this year, although its predictions are more optimistic than those of most economists.

Howard Archer, Global Insight’s chief UK economist, said: “While we continue to believe that the UK will avoid recession, we suspect that it will see an extended period of markedly below-trend growth.

“We forecast GDP growth to slow sharply from 3% to 1.6% in 2008 and 1.5% in 2009 as seriously pressurised consumers tighten their belts, business investment is scaled back and exports are limited by slower growth in key markets despite support from a weaker pound.” The slowdown was caused by stuttering growth in production industries and the service sectors, the ONS said.

The credit freeze slowed the pace of growth in the UK’s services sector, which makes up almost three quarters of the country’s gross domestic product, to 0.6% with finance and business services hit hardest.

A weaker performance from mining and quarry firms also offset increases from manufacturers causing industrial output – accounting for 19% of the economy – to shrink by 0.1% in the opening three months of the year.

Policymakers on the Bank’s Monetary Policy Committee (MPC) have been looking for the economy to slow gradually to bring official inflation back to 2%.

But inflation is currently running above target at 2.5%, limiting the scope for rate cuts to spur on the economy until growth slows enough to ease pressure on prices.

The MPC has slashed rates three times in five months to 5% but business leaders said today’s figures strengthened the case for a back-to-back cut in May. David Kern, the British Chambers of Commerce’s economic adviser, said: “We continue to urge the MPC to announce a modest cut in interest rates to 4.75% in May.”