UK's decade of economic growth grinds to a halt as services falter

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The Independent Online

Britain's longest-ever period of economic expansion officially came to a shuddering halt yesterday as new figures showed the economy failed to grow in the final months of last year.

Britain's longest-ever period of economic expansion officially came to a shuddering halt yesterday as new figures showed the economy failed to grow in the final months of last year.

The growth estimate for the three months to December was slashed to zero from a preliminary figure of 0.2 per cent, its worst performance for more than a decade. This marked the end of the record 37 quarters of unbroken peacetime expansion, which began at the end of the last recession in the third quarter of 1992.

The figure was much worse than expected in the City, where the pound fell amid fading hopes of a hike in interest rates and talk of a rate cut. The British Chambers of Commerce said it was "too early" to talk of rate hikes. Its chief economist Ian Fletcher added: "Another rate cut may be on the horizon as the recovery may be slow to arrive."

The revision left intact the estimate of 2.4 per cent growth for 2001, and the Government brushed aside talk of stagnation.

Andrew Smith, Chief Secretary to the Treasury, told business leaders at a CBI lunch most commentators expected "continued growth with low inflation". Some analysts agreed saying the UK was poised for recovery. "It was a great escape," said Ross Walker at Royal Bank of Scotland.

The end to growth was driven by a sharp slowdown in the services sector, and a further plunge into recession for the manufacturing sector.

According to National Statistics growth in services slowed to 0.7 from 0.9 per cent. Growth in business services, computing, hotels and restaurants was much lower than expected, it said.

This exacerbated a 5.6 per cent slump in manufacturing over the quarter – the worst drop for a decade – that was published after the first GDP estimate.

Despite the slowdown in services the figures highlighted the scale of the imbalance between booming domestic demand and the collapse in industry and exports. On top of the manufacturing recession, oil and gas output tumbled almost 7 per cent and the record trade deficit wiped 0.5 percentage points off total growth.

The 5.4 per cent plunge in export volumes was the largest for more than 20 years Analysts said it was the latest evidence of the severe impact the strong pound was having on exporters.

Meanwhile, household spending surged 1.3 per cent, meaning the annual growth rate of 4.6 per cent was the fastest for two years.

This was echoed in separate figures out yesterday. House prices surged 1.4 per cent this month as buyers flooded back into the market, according to Hometrack. The rise was led by London and southern England. But the North and North-West lagged behind, pointing to a return of a North-South divide.

Hometrack raised its forecast for 2002 to 8 per cent from 5 per cent, warning a shortage of sellers would drive up prices.

Meanwhile, the British Bankers' Association said new mortgage lending rose at its fastest rate on record last month, pointing to increased demand from buyers.

But the contrast will re-awaken concerns about the growing economic imbalances. "If the Bank has not worried about imbalances up to now, there is at least reason for concern after these figures," said Stephen Lewis, the chief economist at Monument Derivatives.

Meanwhile consumer confidence stayed at an eight-month high in February, with fewer people expecting unemployment to rise than at any time since 11 September.

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