UK economic growth slows to three-year low

Figures showing that the British economy is growing at its slowest rate for three years may actually underestimate the level of decline over the past two months, economists warned last night.

Economic growth in the first quarter of this year was just 0.4 per cent, the Office for National Statistics said yesterday, compared with a rise of 0.6 per cent in the previous quarter.

The annual rate of growth is comparatively healthy, at 2.5 per cent, down from 2.8 per cent, the ONS said. But many economists believe the economy is now going through a sharper decline that will continue well into next year.

The ONS figures suggest that the slowdown in the first quarter was spread across the economy. The worst figures were recorded in finance and business services, with growth there down from 0.6 per cent to 0.4 per cent, the worst since 2003. However, the decline in construction was more marked, with growth falling to 0.5 per cent, against 1.1 per cent in the previous three months, because of a collapse in residential house building.

Even so, the ONS said the picture was mixed. Manufacturing growth accelerated to 0.5 per cent in the quarter, up from a nil result at the end of 2007; weak sterling has helped exporters.

However, many analysts saw the data as more historical than usual. The most up-to-date information on company results, advertising spends and forward indicators of orders and confidence show that a more dramatic downturn as imminent.

The intensifying credit crisis, the near collapse of Bear Stearns and the worsening slump in housing – all in March and thus at the end of the ONS reporting period – have depressed business activity and sentiment. A rapidly cooling American economy, now almost certainly in recession, is also having a damaging effect.

Worryingly, the American housing market remains in a tailspin. The US Commerce Department said yesterday that the stock of new houses unsold was at its highest level since 1981, while another survey put consumer confidence at a 26-year low. Sales of new homes fell by 8.5 per cent, and prices dropped 13.3 per cent. The revival of the credit markets depends on US real-estate values bottoming out.

In the UK, most agreed that the pain would spread from banks and construction to the wider economy. The GDP data represent the "start of a deep and prolonged slowdown", according to Capital Economics.

The latest surveys of manufacturers, from the Chartered Institute of Purchasing and Supply (CIPS), the CBI and the British Chambers of Commerce (BCC), show that hitherto buoyant sector suffering from forward orders in decline and soaring commodity prices. The CIPS has said that "the manufacturing sector is already in recession".

In the service sector, accounting for about 70 per cent of the economy, expectations of profitability are at their gloomiest in a decade, said the BCC. The CBI said that "the mood among firms has darkened considerably".