Fears of a UK recession ease

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THE UK economy is proving more resilient than expected, according to figures yesterday, boosting hopes that outright recession could still be averted.

Growth remained positive in the fourth quarter, the Office for National Statistics said, despite falls in output in the manufacturing sector. However, analysts said the Gross Domestic Product figures were still the weakest since the last recession, and did not necessarily mean further interest rate cuts were off the cards.

Ken Wattret at Paribas said: "We continue to expect the Monetary Policy Committee to lower rates in the first week of February, given the underlying deterioration in UK growth and the increasingly favourable outlook for inflation".

Dharshini David at HSBC Securities said: "We still think the MPC can squeeze in a further 0.25-point rate cut, although this might be followed by a few months of wait and see". The ONS said GDP grew by 0.2 per cent in the fourth quarter of 1998, taking the overall growth rate for the year to 2.5 per cent.

Despite gloomy surveys over the past few weeks, the service sector grew by 0.6 per cent in the fourth quarter, only marginally down on the 0.8 per cent growth rate in the third quarter of the year. Analysts attributed the latent strength of the services sector to IT companies as well as providers of other business services such as management consultants, law firms and accountants.

Economists said surveys of the services sector, which primarily measure changes in confidence, could have been affected by adverse developments in the international economy in autumn. Mr Wattret said: "You do tend to get periods where people start to talk themselves into recession, and the surveys could be picking this up".

Others said there was frequently a "lag time" before falls in confidence fed through into lower output and predicted official figures would show the services sector slowing sharply in the first quarter of this year. The picture was less bright in other parts of the economy, with manufacturing slipping into recession for the first time since 1991. The ONS did not provide precise figures for the drop in manufacturing output, but said growth had "fallen sharply". Ms David at HSBC said UK manufacturing could have contracted by as much as 0.75 per cent in the fourth quarter of 1998.