Boom in services sector and cut in deficit dents hope of more rate cuts

Hopes for further cuts in UK interest rates suffered a setback yesterday with fresh evidence of a boom in the services sector and data showing a sharp fall in the current-account deficit.
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The Independent Online

Hopes for further cuts in UK interest rates suffered a setback yesterday with fresh evidence of a boom in the services sector and data showing a sharp fall in the current-account deficit.

National Statistics said the UK economy grew 0.5 per cent in the first quarter, accelerating from 0.4 per cent during the last three months of 2000. The NS had previously estimated the first-quarter figure at 0.4 of a per cent, an upward revision from an earlier forecast of 0.3 of a per cent. On an annualised basis, the economy was growing at 2.7 per cent.

The figures were bolstered by strong consumer spending, fuelling service-sector growth of 0.9 of a per cent. Government spending rose 0.8 of a per cent. Investment from overseas dramatically increased.

However, the economy was growing at a slower rate than the historical average, with a fall of 0.7 of a per cent in manufacturing output the main drag. Business investment fell 2.7 per cent, against a rise in the previous quarter. That reinforced concerns that business might be about order savage lay-offs, fearful over the pace of the global economic slowdown.

The proportion of household income saved rather than spent continued its downward trend, falling to 4.1 per cent, as consumers took heart from continued steady rises in house prices.

The current-account deficit, which measures the net outflow of money from the UK, fell in the first quarter from £3.7bn to £180m, confounding predictions by economists that it was set to widen to more than £4bn. Imported goods exceeded exports by £7.4bn, a slight fall on the fourth quarter. The pound gained ground against the dollar and the euro amid expectations that further cuts in interest rates were less likely.NS also revised last year's growth rate from 3 to 3.1 per cent.

John Butler, UK economist at HSBC, said stronger-than-expected economic growth and current-account figures highlighted the so-called two-speed economy. He warned that much consumer spending was funded by debt. "The economy is even more unbalanced than had previously been estimated," he said. "Government spending is coming through thick and fast, and household spending is not slowing, as the [Bank of England] had hoped, to make room."

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