Sluggish growth puts Brown's forecasts at risk

The UK economy put in a sluggish performance in the second quarter of the year, casting fresh doubt over the Chancellor's growth forecasts.

Official figures showed GDP grew by just 0.3 per cent in the three months to June, raising the chance of further interest rate cuts. The rate of growth disappointed economists in the City because it barely beat the 0.1 per cent increase in the first quarter - the economy's worst three months since the end of the recession in 1992.

Surprisingly strong retail sales figures on Thursday had prompted some analysts to expect growth of 0.5 per cent.

Economists said Gordon Brown's controversial forecasts for growth of 2 to 2.5 per cent for 2003 were now almost unachievable without a massive rebound in the second half of the year. "It does leave the Chancellor's Budget forecast even more adrift from reality. Growth would have to average 0.9 per cent per quarter in the second half of the year to hit the lower point of his range," Philip Shaw, at Investec, said. Ross Walker, at Royal Bank of Scotland, said this would represent "the strongest two consecutive quarters of growth since the height of the stock market boom in the second half of 1999", which he added would be "a tall order".

The figures, half of what the Bank of England had predicted in its May Inflation Report, showed growth so far this year was even weaker than at the same time in 2002 when GDP grew by 1.9 per cent over the whole year. David Kearn, the chief economist at the British Chambers of Commerce, cut his growth forecast for 2003 to 1.7 per cent from 1.9 per cent, which he said "assumed a moderate acceleration in the second half."

While few economists expect the Bank to cut rates when it meets next month, some predicted rates could fall to 3 per cent by the end of the year. This prompted sterling to slide against the euro. "The news is how unbalanced the UK economy remains. The real concern is that the consumer cannot be relied upon for driving a sustainable recovery, and in fact the indebtedness of the consumer implies a sharp deceleration is likely next year. This number supports our view that the rate-cutting cycle is not at an end," John Butler, at HSBC, said.

Yesterday's figures showed the lacklustre performance was driven by the services sector, which makes up two-thirds of the economy. Services grew by just 0.4 per cent, the same as the previous quarter. This was despite the highest rise for one year in the hotels and catering component. A government statistician said hotels and restaurants had seen "unusually strong growth", raising hopes that the recession in the hotel industry might be drawing to a close.