UK economy stalls

Economic activity in the UK is slowing

UK economic growth has fallen to its lowest rate for more than two years.

Gross domestic product (GDP) grew by 2.1% year-on-year in the second quarter of 2001, according to preliminary figures, sharply down from the 2.7% annual rate reported in the first quarter.

UK annual GDP growth (%)

Q1 2000: 3.2

Q2: 3.4

Q3: 3.0

Q4: 2.6

Q1 2001: 2.7

Q2: 2.1

Source: ONS

During the second quarter alone, GDP grew by 0.3%, the slowest quarterly rate since October 1998.

The figure came precisely in the middle of the range of analysts' forecasts, although some pessimists had predicted zero growth.

Analysts were keen to stress that the growth slowdown did not spell an outright slump.

"Britain is nowhere near a recession," said Barclays Stockbrokers economist Hilary Cook.

Outside impacts

While the British economy has performed more robustly than its neighbours in recent months, the slowdown in the United States and in the euro zone was expected to take its toll sooner or later.

Foot-and-mouth disease may also have had an impact, as many economists had predicted that the crisis could have shaven something like half a percentage point off UK growth.

The pound firmed slightly on the figures, since there had been rumours late on Thursday of an even weaker growth number.

Share and bond markets, which had also been braced for worse news, also reacted calmly.

The FTSE 100 share index was up 80 points at 5,370 at 1030 GMT.

Rate calls

The news is, however, likely to add further fuel to the campaign for a cut in interest rates.

The Bank of England's Monetary Policy Committee (MPC) has left base rates unchanged, at 5.25%, since May.

The MPC is due to meet again on 1 and 2 August.

Calls for a rate cut have been loudest from the manufacturing sector, which argues that high rates and the relatively strong pound have led to a severe slowdown.

"This evidence of a slight cooling in the service sector and the continued decline in manufacturing... suggests a quarter-point cut in interest rates can safely be made as inflationary pressures remain under control," said Sudhir Junankar, director of economic analysis at the Confederation of British Industry.

Two-speed economy

This has contributed to the so-called two-speed economy in the UK, where traditional industry slumps, while consumer spending and the service sector continue to prosper.

Some analysts said the figures showed that the two speeds were beginning to converge.

"Chances are that retail sales will begin to ease," said Jeremy Hawkins of Bank of America.

"The global economy is in poor shape and unless oil prices rebound significantly, inflation will not be a problem."