Slowdown in growth fuels hopes of rate cut

Economy: Expansion dips for the first time in two years but bid speculation boosts shares

PAUL WALLACE

Economics Editor

A sharp slowdown in economic growth triggered fresh hopes of a cut in interest rates, helping to drive the stock market to a new peak yesterday. The slide in growth was seen as further confirmation that the Chancellor, Kenneth Clarke, has won his interest rate tussle with the Bank of England Governor, Eddie George.

Sterling closed down two-tenths of a point against the basket of currencies as figures were released to show the economy expanded at only 0.5 per cent in the second quarter of the year, causing economic growth to dip below its underlying rate of increase for the first time in two years. The Central Statistical Office had initially estimated second quarter growth at 0.6 per cent.

The main reason for the slowdown was disappointing performance from exports, which have been affected by the general slackening in economic activity worldwide. These showed no sign of improvement in July, as the trade gap with countries outside the European Union widened to pounds 856m, its highest since the beginning of 1993 and much worse than the deficit of pounds 630m expected.

"The next move in base rates appears to be down, although probably not until next year," said Michael Saunders, UK economist at Salomon Brothers. The March short sterling futures contract, which was indicating a rise of half a percentage point only a week ago, closed at a level indicating that the City now expects rates will be under 7 per cent next spring.

In its quarterly review of the economy, the National Institute of Economic & Social Research said that interest rates could safely be left on hold without leading to anything more than a marginal breach in the Government's target of 2.5 per cent underlying inflation. Only three months ago, it forecast rates would have to rise by 1.75 percentage points by next year if the Government was to meet the inflation target.

Andrew Smith, Shadow Chief Secretary, said: "Slower growth, low investment, rising unemployment and the wider trade gap show the economic situation is weaker than the Chancellor makes out."

But a Treasury spokesman said the economy was still growing at a sustainable rate.

On the output side of the economy, the main reason for the downward revision to growth was that construction declined by 1.1 per cent compared with the first quarter, more than had initially been thought. Oil and gas extraction and energy supply were also lower than expected. In addition, services sector output was revised down from 0.8 to 0.7 per cent, with air transport showing no growth and insurance and banking weak.

The expenditure breakdown of growth suggested that the pace of economic activity could slow still further in the rest of the year as companies sought to run down stocks. This was the main danger of a downturn identified earlier in the month by the Bank of England in its Inflation Report.

Stockbuilding alone added 0.6 per cent to gross domestic product, with the stockbuilding of pounds 1.6bn in the second quarter the highest figure for six and a half years. The main build-up occurred in distribution and retailing, as wholesalers that had been destocking in the first three months of the year restocked and retailers increased stockbuilding.

The rise in inventories "looks like an involuntary response to the earlier slowdown in final demand rather than a sustainable source of growth," Mr Saunders warned. "Unless final demand surprisingly revives, then pressure to cap the rise in inventories is likely to slow the economy further and limit the inflation pick-up later this year."

However, a rebound in consumer spending, which had declined marginally in the first quarter of the year, allayed fears of a more lasting downturn. Consumer expenditure picked up by 0.8 per cent in the second quarter, although 0.2 per cent of that was attributable to the lottery effect and in particular the introduction of scratch cards.

With income from employment falling in the second quarter, consumer spending growth of just over 2 per cent is expected to remain subdued by past standards. However, the implied willingness of consumers to run down savings in the second quarter contrasted sharply with the surprise increase in the savings ratio in the first three months of the year. The bounce-back in consumer spending "will mollify worries of a sharp deceleration in economic growth", said Don Smith, economist at HSBC Markets.

After falling in the first quarter of the year, fixed investment recovered by 1.3 per cent thanks to greater purchases of aircraft and the inclusion of the cruise ship Oreana in the figures. The overall investment trend remained flat.

The overall effect was to boost domestic demand by 1.4 per cent. However, net trade fell by almost 1 per cent, the biggest decline since the end of 1988. Two-thirds of the decline was attributed by the CSO to a fall in exports, one third to an increase in imports.

Figures for trade in July with countries outside the EU suggested exports continued to be hit by the world economic slowdown, particularly in the US.However, while exports fell back, imports surged. Excluding oil and erratics, the volume of exports in the three months to July was down by 0.5 per cent, while the volume of imports rose by 5 per cent.

The resulting trade imbalance of pounds 856m was worse than the pounds 759m notched up in June. Although the deficit was little changed on a monthly basis once oil and erratics were excluded, there was a trend widening in the balance.

In the three months to July, the deficit was pounds 2.3bn compared with pounds 1.1bn in the previous three months.

Comment, page 17

Start your day with The Independent, sign up for daily news emails
PROMOTED VIDEO
Arts and Entertainment
The Apprentice candidates Roisin Hogan, Solomon Akhtar, Mark Wright, Bianca Miller, Daniel Lassman
tvReview: But which contestants got the boot?
Arts and Entertainment
Jim Carrey and Jeff Daniels ride again in Dumb and Dumber To
filmReview: Dumb And Dumber To was a really stupid idea
News
people

Jo from Northern Ireland was less than impressed by Russell Brand's attempt to stage a publicity stunt

Sport
Scunthorpe goalkeeper Sam Slocombe (left) is congratulated by winning penalty taker Miguel Llera (right)
football
Life and Style
A woman walks by a pandal art installation entitled 'Mars Mission' with the figure of an astronaut during the Durga Puja festival in Calcutta, India
techHow we’ll investigate the existence of, and maybe move in with, our alien neighbours
Arts and Entertainment
Sir Ian McKellen tempts the Cookie Monster
tvSir Ian McKellen joins the Cookie Monster for a lesson on temptation
News
i100
News
ebooksNow available in paperback
Travel
Tourists bask in the sun beneath the skyscrapers of Dubai
travelBritish embassy uses social media campaign to issue travel advice for festive holiday-makers in UAE
Arts and Entertainment
Jennifer Saunders stars as Miss Windsor, Dennis's hysterical French teacher
filmJennifer Saunders and Kate Moss join David Walliams on set for TV adaptation of The Boy in the Dress
Life and Style
tech
Sport
Nabil Bentaleb (centre) celebrates putting Tottenham ahead
footballTottenham 4 Newcastle 0: Spurs fans dreaming of Wembley final after dominant win
Life and Style
Sebastian Siemiatkowski is the 33-year-old co-founder and CEO of Klarna, which provides a simple way for people to buy things online
tech
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Ashdown Group: Java Developer - Hertfordshire - £47,000 + bonus + benefits

£40000 - £470000 per annum + bonus: Ashdown Group: Java Developer / J2EE Devel...

Ashdown Group: Direct Marketing Manager - B2C, Financial Services - Slough

£45000 - £55000 per annum + Benefits: Ashdown Group: An exciting opportunity h...

Carlton Senior Appointments: Sr Wealth Manager - San Francisco - Inv AdvisoryFirm

$125 - $175 per annum: Carlton Senior Appointments: Senior Wealth Manager – In...

Carlton Senior Appointments: Private Banking Manager - Intl Bank - Los Angeles

$200 - $350 per annum: Carlton Senior Appointments: Managing Producer – Office...

Day In a Page

Jeb Bush vs Hillary Clinton: The power dynamics of the two first families

Jeb Bush vs Hillary Clinton

Karen Tumulty explores the power dynamics of the two first families
Stockholm is rivalling Silicon Valley with a hotbed of technology start-ups

Stockholm is rivalling Silicon Valley

The Swedish capital is home to two of the most popular video games in the world, as well as thousands of technology start-ups worth hundreds of millions of pounds – and it's all happened since 2009
Did Japanese workers really get their symbols mixed up and display Santa on a crucifix?

Crucified Santa: Urban myth refuses to die

The story goes that Japanese store workers created a life-size effigy of a smiling "Father Kurisumasu" attached to a facsimile of Our Lord's final instrument of torture
Jennifer Saunders and Kate Moss join David Walliams on set for TV adaptation of The Boy in the Dress

The Boy in the Dress: On set with the stars

Walliams' story about a boy who goes to school in a dress will be shown this Christmas
La Famille Bélier is being touted as this year's Amelie - so why are many in the deaf community outraged by it?

Deaf community outraged by La Famille Bélier

The new film tells the story of a deaf-mute farming family and is being touted as this year's Amelie
10 best high-end laptops

10 best high-end laptops

From lightweight and zippy devices to gaming beasts, we test the latest in top-spec portable computers
Michael Carberry: ‘After such a tough time, I’m not sure I will stay in the game’

Michael Carberry: ‘After such a tough time, I’m not sure I will stay in the game’

The batsman has grown disillusioned after England’s Ashes debacle and allegations linking him to the Pietersen affair
Susie Wolff: A driving force in battle for equality behind the wheel

Susie Wolff: A driving force in battle for equality behind the wheel

The Williams driver has had plenty of doubters, but hopes she will be judged by her ability in the cockpit
Adam Gemili interview: 'No abs Adam' plans to muscle in on Usain Bolt's turf

'No abs Adam' plans to muscle in on Usain Bolt's turf

After a year touched by tragedy, Adam Gemili wants to become the sixth Briton to run a sub-10sec 100m
Calls for a military mental health 'quality mark'

Homeless Veterans campaign

Expert calls for military mental health 'quality mark'
Racton Man: Analysis shows famous skeleton was a 6ft Bronze Age superman

Meet Racton Man

Analysis shows famous skeleton was a 6ft Bronze Age superman
Garden Bridge: St Paul’s adds to £175m project’s troubled waters

Garden Bridge

St Paul’s adds to £175m project’s troubled waters
Stuff your own Christmas mouse ornament: An evening class in taxidermy with a festive feel

Stuff your own Christmas mouse ornament

An evening class in taxidermy with a festive feel
Joint Enterprise: The legal doctrine which critics say has caused hundreds of miscarriages of justice

Joint Enterprise

The legal doctrine which critics say has caused hundreds of miscarriages of justice
Freud and Eros: Love, Lust and Longing at the Freud Museum: Objects of Desire

Freud and Eros

Love, Lust and Longing at the Freud Museum