UK growth at zero, according to think-tank

The UK economy failed to grow in the last quarter of 2001, a respected independent think-tank said yesterday, making it the worst performance since the end of the last recession a decade ago.

The UK economy failed to grow in the last quarter of 2001, a respected independent think-tank said yesterday, making it the worst performance since the end of the last recession a decade ago.

The National Institute of Economic and Social Research said the economy recorded zero growth in November. "We project the rate of growth in the three months ending in December 2001 also to be 0.0 per cent," said Martin Weale, its director.

Official figures for growth in the quarter, and for 2001 as a whole, are not published until next week. Despite the negative psychological impact, the Treasury is confident it will hit its forecast of 2.25 per cent for 2001 despite zero growth in the final quarter.

Yesterday official figures showed that manufacturing contracted in November at its fastest rate since the last recession. Output fell by 0.7 per cent, taking annual decline to 5.4 per cent – the worst month since September 1991. The figures were much worse than expected and eroded the growing certainty in the City that the next move in interest rates would be up.

The figures came as Sir Edward George, the Governor of the Bank of England, defended his policy of cutting rates to boost consumer demand.

In a speech to Scottish business leaders he acknowledged the pain exporters suffered from the slump in global demand, but said: "We can't do anything directly about it. Stimulating domestic demand to offset the external weakness was the only effective option we had."

However, he repeated the warning he issued last week that rates would rise if the global economy recovered and consumer spending failed to slow down.

The manufacturing data revealed sharp falls in output from in the hi-tech engineering, car production and mobile phones industries.

Separate figures showed little sign of inflationary pressure from industry. Prices charged by manufacturers in December were 1.2 per cent lower than a year earlier.

Raw materials prices fell 0.7 per cent on the month to be 6.6 per cent lower than a year ago due to recent sharp falls in crude oil prices.

This week will be key for the outcome of the Bank's next monetary policy meeting with inflation figures due to be published today, unemployment and average earnings tomorrow and retail sales data due out on Thursday.

Economists said that although the financial markets were aware of the parlous state of manufacturing, the scale of the decline would cause some people to doubt the Bank of England had finished cutting rates.

"The persistence of anaemic output data could help secure further monetary easing next month," said Ross Walker, UK economist at Royal Bank of Scotland.

John Butler, at HSBC, said cutting rates further would worsen the imbalance in the economy. "But the weak manufacturing side will be a constraint on early rate rises."