UK on brink of recession as growth falls to 0.1%

Britain is hovering above recession for the first time in a decade, shockingly bad official figures showed yesterday that are likely to keep interest rates on hold for some months to come.

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Britain is hovering above recession for the first time in a decade, shockingly bad official figures showed yesterday that are likely to keep interest rates on hold for some months to come.

The economy grew just 0.1 per cent over the three months to March, following a tiny contraction in the last quarter of 2001.

This is the worst six months since the end of the recession in 1992. This latest figure could be revised down – leaving open the possibility the UK could contract for two quarters – the definition of recession.

"These figures show how dangerously the economy skirted with recession at the turn of the year," said Philip Shaw, an economist at the brokers Investec.

The economy is now growing at an annual rate of 1.0 per cent, its lowest since 1992.

The UK picture was a sharp contrast to the United States, where the economy roared out of recession with surprising strength, posting its strongest growth for more than two years.

American GDP raced ahead at an annual rate of 5.8 per cent in the first quarter – a full percentage point higher than the forecasts of Wall Street economists.

The main factor was an "inventory swing" as businesses relied much less heavily on existing stocks to meet demand for their products. However, fears are mounting that this could lead to a very weak figure in the second quarter.

The UK growth figure was just a fraction of the 0.4 per cent forecast by City economists, who responded yesterday by delaying their forecasts for the first hike in rates.

National Statistics, which produced the figures, said the key factor was the services sector, which grew by just 0.5 per cent – the same as the fourth quarter of 2001 and almost half its recent trend of 0.9 per cent.

Hotels and restaurants and business services such as lawyers and accountants suffered a contraction, while there was little growth in the motor and wholesale trades and in the banking industry.

The manufacturing industry suffered another quarter of decline while the energy industry and the utilities sector also contracted.

The economy would have to grow as much as 1 per cent in each of the remaining quarters to hit the Government's target of 2 to 2.5 per cent, econo-mists said.

George Buckley, a UK economist at Deutsche Bank, said: "Clearly with growth so far below trend a near-term rate hike from the Bank of England is looking increasingly unlikely."

One of the hawkish economists, Michael Saunders at Schroder Salomon Smith Barney, abandoned his forecast for a rate hike next month.

Some analysts pointed out that the data conflicted with the positive signs from surveys that had pointed to a boom on the high street and mounting confidence on the factory floor and in offices.

The CBI, the British Chambers of Commerce, the British Retail Consortium and the authoritative survey of managers all indicated a sharp turnaround in business fortunes.

David Hillier, the chief UK economist at Barclays Capital, said the statisticians had "completely underestimated" the level of growth.

"History suggests that they continually underestimate growth," he said. "That needs to be corrected immediately because it keeps interest rates at an inappropriately low level.

"In our view rates need to go up now, but following this number they probably won't go up for a couple of months."

A spokesman for the Treasury said: "It is very early days and these figures will be revised twice and are likely to change."