The UK economy: Things can only get tougher

Retail sales hit 22-year low. Growth at 12-year low. Inflation at nine-year high. Unemployment rising
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The Independent Online

Economic output showed an annual growth rate of 1.5 per cent during the summer, the lowest since the first quarter of 1993 when Britain, under John Major's Tory government, was emerging from recession.

The news, a revision to the Government's own figures yesterday, follows the Chancellor's admission that he would miss his forecast of growth of between 3 and 3.5 per cent this year. He had hinted during a visit to Washington for last week's International Monetary Fund meetings, that growth this year would be above 2 per cent but below 2.5 per cent.

The gloom was compounded by figures showing high street sales were falling at the fastest rate for at least two decades and a global study which found the UK competitiveness had fallen.

Inflation is also a worry, with the consumer price index for August rising to 2.4 per cent, the highest level for nine years. Any deterioration in the economy will seriously hamper Mr Brown's leadership ambitions in the light of Tony Blair's determination to serve as Prime Minister for three more years.

The Conservatives seized on yesterday's figures, saying they were further proof the Government would have to hike taxes to make up for a shortfall in the Treasury's coffers.

George Osborne, the shadow Chancellor said: "We now know why Gordon Brown was forced into his humiliating climbdown at the IMF. This, yet again, raises the chances that taxes will have to go up to pay for Brown's excessive borrowing. What this country needs is a chancellor with his mind on the job, not on inheriting the Prime Minister's crown."

The Treasury defended its record, saying no country could insulate itself from the "ups and downs" of the world economy.

A spokesman said: "We are facing the highest sustained oil prices for a quarter of a century, growth in our main export market - the eurozone - has slowed and house prices has slowed to a more sustainable level . In previous years, any one of these shocks would have tipped the UK into recession. Instead employment is at a record high and the economy continues to grow every quarter - delivering a record 52 quarters of uninterrupted growth."

The figures from the Office for National Statistics showed the economy had slowed more than first thought at the end of last year and the start of 2005.

The pound dropped to a two-month low against the dollar because traders were betting that the Bank of England would cut interest rates to prop up growth. Other analysts said Mr Brown would miss even his latest growth forecast.

"It puts it in jeopardy to say the least," said Nick Stamenkovic, a senior economist at RIA Capital Markets in Edinburgh.

Lehman Brothers, one of Wall Street's blue-chip banks, slashed its growth outlook for this year to 1.6 per cent from 1.8 per cent, and forecast a further slowdown in 2006 to just 1.5 per cent.

The drumbeat of poor economic news has picked up in recent weeks. Manufacturing is in recession after two quarters of decline while unemployment has risen for seven months on the trot - again the first time since the early 1990s. The number of homeowners in danger of losing their property has risen to its highest level since the tail end of the last housing crash - although the numbers are still small.

In Washington, Mr Brown put the blame on oil prices. However, many experts say the downturn is driven by the impact of rising interest rates on debt-laden households fearful of further tax hikes. A CBI survey showed the number of retailers reporting a drop in sales outnumbered those enjoying a rise by a record 24 per cent.

Howard Archer, UK economist at consultants Global Insight, said the survey was "disturbingly weak". He added: "The survey will heighten concern that the slowdown in consumer spending is firmly entrenched."

Yesterday, HMV, the music and books retailer, and House of Fraser, the department store group, became the latest high street names to report a fall in sales before the crucial Christmas period.

But some experts said the latest figures contained glimmers of hope. The ONS doubled its estimate of growth in household spending and tripled the figure for business investment. Geoffrey Dicks, chief UK economist at Royal Bank of Scotland, said it was "evidence of a recovery".