Cut in growth forecasts raises prospect of rate reduction

Government statisticians slashed their estimate yesterday of economic growth this year as an abrupt slowdown in consumer spending put financial markets on notice for an early cut in interest rates.

The economy grew by just 0.4 per cent in the first quarter, the Office for National Statistics said, a cut from its first estimate of 0.6 per cent. The ONS cut its figure for annual growth from 2.7 to 2.1 per cent, leaving it well adrift of Gordon Brown's ambitious target for this year of 3.0 to 3.5 per cent.

"The downward revisions make an August cut much more likely," said Simon Rubinsohn, the chief economist at Gerrard stockbrokers. "As for the Chancellor's forecasts, the time for eating humble pie has come."

Nick Stamenkovic, an economist at RIA Capital Markets, went further saying the monetary policy committee would cut rates next week unless there was a bounce in key business surveys coming out either side of the weekend then.

"It's a case of when rather than whether for rate cuts," he said. "If the surveys of manufacturing and services show a real weakness then the MPC will react quickly."

The pound fell below $1.80 against the dollar for the first time in 10 months yesterday as separate surveys showed a fall in both house prices and consumer confidence last month.

The fall in growth was due to a downward revision in consumer spending from 0.3 per cent to 0.1 per cent, making it the weakest quarter for almost five years.

Almost £1bn of unsold goods stacked up in warehouses as households showed signs of rebuilding their savings. The savings ratio – a sign of whether households were using their spare cash for investments rather than spending – rose to 4.8 from 3.9 per cent. On the output side the ONS lowered its estimate of manufacturing decline to 0.9 from 0.7 per cent while services growth was cut to 0.7 from 0.8 per cent. It said manufacturers, retailers and car showrooms were left with more than £800m of unsold goods at the end of the quarter.

There were also downward revisions to GDP growth over the final three quarters of last year. There was some good news for the Government as the new estimates showed growth in the three years to 2004 was some 0.5 percentage points higher than first thought.

The Treasury declined to comment on the figures but Whitehall sources said they showed the economy had grown 10 per cent over the past four years.

Nationwide building society said the average price of a home fell 0.2 per cent in June to take the annual rate to a nine-year low of 4.1 per cent. Consumer confidence also slipped in June. The index from the research company GfK Martin Hamblin slipped to minus three from minus one in May.

A separate survey by GfK showed more people plan to save pay off their debts in the next few months.

Howard Archer, the UK economist at Global Insight, said: "There is a very real risk that consumer spending will be muted for an extended period without any other areas of the economy compensating significantly for this."