Slide in industrial production casts doubt on UK growth

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The extent of a two-speed economy in the UK was revealed yesterday by figures showing a surge in services output and consumer spending but a slump in industrial production.

The overall level of GDP in the final quarter of last year was revised down slightly but not by enough to pull down the headline growth rate of 0.6 per cent. The annual growth rate of 1.8 per cent, which was already the worst for 13 years, was also left unchanged, the Office for National Statistics said.

There was a silver lining for the Government from the data, which showed inflation in the public sector had fallen markedly over the past three years.

The ONS said it had lowered its initial estimate of the output of the production industries ­ manufacturing, the North Sea and public utilities ­ from a fall of 0.6 per cent to a drop of 0.8 per cent. Growth in the services sector was unchanged at 0.9 per cent, with three of the four sub-sectors recording growth of at least 1 per cent.

Meanwhile, the first estimates of expenditure showed consumer spending grew 0.7 per cent on the quarter, its healthiest growth rate for more than a year.

"The preliminary data for the fourth quarter confirms the impression there is a two-speed economy in the UK," Stephen Lewis, the chief economist at Monument Securities, said. "The question is whether that rate will be sustained this year. Preliminary indications suggest that pre-Christmas strength in spending has not persisted."

The detailed breakdown showed inflation in the public sector had slowed from more than 7 per cent at the start of 2003 to 2.3 per cent in the latest quarter. Analysts said it could be a sign the vast sums of money pumped in services such as education and health was finally being converted into improved performance.

The data also confirmed figures released this week showing a slump in business investment but a positive contribution from net trade.

Alan Castle, a UK economist at Lehman Brothers, said: "All in all, the data will do little to resolve the uncertainties around the near-term GDP outlook identified in the Bank's February inflation report."

Yesterday Charlie Bean, the Bank of England's chief economist, said businesses had been hurt by higher energy costs, although he didn't specify whether this was an upside or downside risk to inflation.

"There's no doubt that increases in energy costs have meant a squeeze on margins, and it's unlikely the relative price of energy is going to drop in the near future," he told the Leicester Mercury. "I certainly wouldn't say energy costs have to rise further, but it has to be a risk."

On Thursday, a fellow MPC member, David Walton, said high energy prices could lower potential output and therefore stoke inflationary pressures.