GDP slows down to 0.4% as sterling squeezes exports

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The Independent Online
THE ECONOMY grew more slowly than expected in the final quarter of last year, with growth trimmed sharply by the squeeze on exports. The contrast between booming demand at home and a rapidly deteriorating trade position could scarcely have been sharper.

The increase in GDP in the fourth quarter was just 0.4 per cent, revised down from the initial estimate of 0.5 per cent and less than half the rise in the third quarter.

The Office for National Statistics also revised its estimates for earlier quarters, trimming GDP growth for 1997 as a whole to 3.2 per cent from the initial estimate of 3.3 per cent.

The surprisingly weak figures trimmed three pfennigs off sterling's exchange rate against the German mark, taking it to just over DM2.95.

Consumer spending bounced by 1.3 per cent, taking its year-on-year rise to the highest since mid-1989, at 4.5 per cent. Altogether domestic spending, including investment and government expenditure, added 1.5 per cent to the economy's growth, in its strongest quarterly rise since 1988.

But falling exports and a jump in imports knocked a full percentage point off overall fourth-quarter growth, leaving the overall expansion subdued.

The figures did little to budge any City experts in their views about interest rates. Simon Briscoe at Nikko Europe said all of the strength in the economy was concentrated in business and financial services, which accounted for less than a quarter of output. "Even 2 per cent on interest rates would not stop companies spending to tackle the millennium bug," he said.

In the other camp, Adam Cole at HSBC James Capel, predicted the Bank of England would increase the cost of borrowing again because it was now focusing on the strength of demand and pay pressures at home.

The diverging fortunes of consumers and exporters was mirrored in the split between manufacturing and services. Manufacturing output fell by 0.4 per cent in the fourth quarter, while total industrial production dropped by 1.1 per cent thanks to a big fall in electricity, gas and water supply.

On the other hand, total services output climbed by 1.1 per cent, with both business services and finance and telecommunications surging.