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U.K. 1st-Quarter Growth Slows to Weakest in a Decade

27/06/2003 15:37
Britain's economy grew at the weakest pace in more than a decade in the first quarter as construction output fell and consumers curbed spending, reinforcing expectations of an interest rate cut as soon as next month.

Gross domestic product rose 0.1 percent from the fourth quarter, revised down from 0.2 percent estimated in May, the government said. It was the slowest pace since the second quarter of 1992. Annual GDP growth was revised down to 2.1 percent from 2.2 percent.

``It increases the chance of a July rate cut,'' said George Buckley, an economist at Deutsche Bank AG in London. ``It makes the Bank of England's forecast of 2.3 percent GDP growth this year even more difficult to achieve.''

Sir Edward George, the U.K. central bank's governor, said this week the global economic recovery he expects is ``not a done deal,'' which may hamper Britain's growth. The bank last lowered interest rates in February. Twenty-one of 30 economists surveyed by Bloomberg News last week forecast another quarter-point rate cut to 3.5 percent by September.

Futures trading shows investors are betting on another U.K. rate cut. The yield on a three month sterling deposit maturing in September was 3.48 percent today.

Alan Castle, an economist at Lehman Brothers, said after today's report he now expects a rate cut in July rather than August. He noted that the pound has risen 3.5 percent against the currencies of Britain's major trading partners since the last meeting of the bank's rate-setting committee earlier this month.

Consumer Spending

Construction output dropped 1.9 percent in the first quarter from the fourth compared with a previously estimated 2.1 percent rise. Household spending was also revised lower, to a quarterly rate of 0.2 percent from 0.4 percent as retail sales growth slowed. That's the weakest pace since the third quarter of 1997.

Body Shop International Plc, the U.K. retailer of natural cosmetics such as Banana Shampoo, said yesterday first-quarter sales fell 3 percent, hurt by a drop in London tourism. Marks & Spencer Group Plc, Britain's largest clothing retailer, has cut staff bonuses as earnings growth slowed.

Britain has fared better than some countries in the euro region. In the first quarter, Germany, Europe's biggest economy, contracted as did the GDP of Italy and the Netherlands. Growth in France was higher, at 0.3 percent.

The U.S. economy expanded at a 1.4 percent annual rate, the same as in the fourth quarter and revised down from a previous estimate of 1.9 percent, the government said yesterday.

U.K. fourth-quarter growth was revised higher to 0.5 percent from 0.4 percent. Last year the economy expanded by 1.9 percent, revised from 1.8 percent due to a higher estimate for investment.

Military Spending

Growth in service industries from banking to retail in the first quarter was revised up to 0.4 percent from 0.3 percent. Government expenditure was also revised higher to a quarterly gain of 2.5 percent, the biggest since 1991, reflecting increased spending on military defense in the build-up to the Iraq war.

Exports increased 2.2 percent in the first quarter, compared with a previous estimate of a flat outturn.

``This suggests the economy is being held afloat by global demand and actually the biggest drag is through a rapidly slowing domestic economy,'' said John Butler, a former Bank of England economist now at HSBC Holdings Plc. He said the slowdown was due in part to concerns about the war. ``The second quarter should be much stronger, particularly on the consumer side.''

British consumers were the least pessimistic in June than at any time in the last seven months, a survey by research company Martin Hamblin GfK showed today. Its consumer confidence index rose to minus 2 from minus 3 in May.


Manufacturing, which accounts for a fifth of the economy, rose 0.1 percent in the first three months of the year. The wider measure of industrial output, which includes manufacturing, utilities and mining, fell 0.4 percent as warm weather led to declines in electricity and gas supply.

Halma Plc, the world's second-biggest maker of fire detectors, said last week second-half profit dropped 10 percent. Goldshield Group Plc, a U.K. maker of generic drugs, reported a full-year loss this year.

Britain posted a current account surplus of 2.4 billion pounds ($4 billion) in the first quarter, compared with a deficit of 1.8 billion pounds in the previous three-month period, a separate government report said. That was the first surplus since the third quarter of 1998 and the highest surplus since 1981.

The move to a surplus was driven by a `large'' rise in investment income and a narrowing trade in goods deficit, the government said.