Output falls as economy turns sluggish

A tough summer for industrial-based firms was blamed today for the economy's weakest quarter of growth since early last year.

A tough summer for industrial-based firms was blamed today for the economy's weakest quarter of growth since early last year.

Gross domestic product is estimated to have grown by 0.4 per cent in the three months to the end of September - down on the 0.9 per cent seen in the second quarter and short of City expectations. The year-on-year rate was 3 per cent, compared with 3.6 per cent reported in the second quarter.

The lacklustre quarterly performance reflected a 1.1 per cent drop in the volume of output in production industries as companies faced up to sky-high oil prices, higher interest rates and weak demand from overseas customers.

The latest figures, which can still be revised by the Office for National Statistics (ONS), led analysts to scale back forecasts for growth in 2004.

David Page, of Investec Securities, is now looking for a figure in the region of 3.3 per cent, compared with hopes of 3.5 per cent prior to today and 3.6 per cent earlier in the year.

He believed the data would encourage the Bank of England's Monetary Policy Committee (MPC) to sit tight and keep interest rates at 4.75 per cent next month.

He added: "It's unlikely we will see another change in rates this year. There's too much uncertainty and so the MPC will want to take their time."

The GDP data signals the re-emergence of a two-tier economy in the UK as, while the manufacturing recovery showed signs of stalling, the consumer side remained resilient - as shown by above-trend growth in the service sector of 0.8 per cent.

While the industrial sector only makes up 20 per cent of the UK economy, today's drop proved sufficient to offset growth in services, where output is running 4 per cent stronger than a year earlier.

Earlier this month, official figures reported a 0.8 per cent decline in manufacturing output - the third in as many months - between July and August.

The data were viewed at the time as the strongest evidence yet that factory bosses were back in the doldrums after signs of recovery earlier in the year.

Today's industrial slump of 1.1 per cent is the largest decline since the end of 2001, when output fell 2 per cent following the September 11 terrorist attacks.

The ONS said 12 of its 14 production sub-sectors experienced declines, with the most significant being in chemicals and paper, printing and publishing.

Analysts pointed out the figures could still be revised upwards, with the rest of the year likely to reflect a steadier performance.

HSBC economist John Butler said: "We expect much stronger growth in the fourth quarter and on that basis, together with rising cost pressures, believe it is too early to conclude that interest rates have necessarily peaked."