Brown's growth forecasts in peril after GDP figures hit two-year low

Gordon Brown is now reliant on a boom kicking in over the rest of the year to hit his ambitious Budget growth forecasts, econo-mists said yesterday as official figures for GDP in the first quarter were cut to a two-year low.

Gordon Brown is now reliant on a boom kicking in over the rest of the year to hit his ambitious Budget growth forecasts, econo-mists said yesterday as official figures for GDP in the first quarter were cut to a two-year low.

The economy grew 0.5 per cent in the first three months of the year, revised down from last month's 0.6 per cent estimate as factory output fell sharply and the consumer slowdown continued. It took the annual growth rate down a point to 2.7 per cent, a two-year low and below the Chancellor's forecast of between 3.0 and 3.5 per cent for the year as a whole.

"The chance of the Chancellor hitting his forecast are receding into the distance," said Philip Shaw, chief UK economist at Investec. "As the data currently stand, the economy would have to grow by a minimum of 1 per cent a quarter for the range to be hit." Howard Archer at the consultants Global Insight said: "He [Brown] is clearly going to have some difficult tax and spending decisions to make come next year's Budget."

The cut in the growth estimate had been expected following the 0.7 per cent fall in manufacturing output published after the first estimate of GDP. The Office for National Statistics said the fall had sliced 0.13 percentage points off GDP.

Yesterday's figures also showed that household spending grew by 0.3 per cent, taking the annual growth rate to 2 per cent, which has not been weaker since the summer of 1995.

Growth was dependent on government spending, which rose by 0.7 per cent on the quarter - although even that was slower than the second half of last year.

A narrowing of the trade deficit added 0.4 percentage points to growth although that was driven by a drop in imports - reflecting weak retail sales - rather than a rise in exports.

Economists said the key issue for growth and interest rates going forward was whether investment and trade would offset the consumer slowdown.

The picture contrasted with the US, where durable goods orders rose by the most in five months in April and Americans bought new homes at a record pace. The strength of the housing data, which follows figures pointing to strong price rises, will revive fears of a property market bubble despite eight increases in interest rates.

There was gloom from Germany, where business confidence fell for a fourth consecutive month this month. The Ifo institute's index dropped to 92.9 points from 93.3 in April, dashing economists' expectations of a rise to 93.5. It was the lowest since August 2003

In Japan there was a rare split on the central bank's board last month when Toshikatsu Fukuma voted against leaving the central bank's funds target unchanged and called for a lower target. The minutes revealed a heated debate, with the majority saying a cut could be seen as a sign of a change in its ultra-easy monetary policy.