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Friday, 27 April, 2001, 14:42 GMT 15:42 UK
Slow growth threatens spending
The foot-and-mouth virus restrictions have prevented farmers from moving their sheep resulting in sheep dying because of the recent bad weather.
The foot and mouth crisis.has hit tourism
By the BBC's economics reporter, Jenny Scott

The British economy grew by its slowest rate for more than two years in the three months to the end of March. If it were to carry on at this pace, growth in 2001 would be around half its average growth rate of 2.5%.

Perhaps more importantly, it would be significantly less than the government's forecast, which could call into question its generous spending plans.

So how worried should we be?

On the negative side, there is plenty of bad news that suggests the economy could be in for a tough time.

Friday's numbers confirm that British industry is now in recession, defined by economists as two consecutive quarters of contraction.

Chancellor Gordon Brown
Gordon Brown: No fears of a slowdown

In other words, the manufacturing and energy sectors combined, which account for just over a fifth of total output, have shrunk in the last six months.

This suggests that the global slowdown is starting to have a damaging impact on the economy.

Foot and mouth

There were also signs that the foot and mouth crisis has taken its toll.

Although the effects on agriculture - which makes up less than 2% of the economy - were "minimal", the tourism industry has clearly taken a hit.

Growth in distribution, hotels and catering halved in the first quarter to just 0.4%, from 0.8% in the fourth quarter of last year.

Taken together, some economists think those two factors will mean the economy will struggle to reach trend growth this year, defined as between 2.25% and 2.5%.

"Coupled with the recent deterioration in the forward-looking indicators, it is becoming increasingly clear that consensus forecasts of trend growth this year are likely to prove too optimistic," says Jonathan Loynes, chief UK economist at Capital Economics.

That in turn suggests the government's forecast of 2.25% to 2.75% growth this year will also be too optimistic.

The Chancellor uses the lower end of that forecast for his budget assumptions and has insisted recently that they will be met.

Even the experts at the Bank of England have been caught out.

Their latest forecast, completed in February, assumed growth in the first quarter of 0.8% - more than double the eventual outturn.

Not all doom and gloom

However, that could be something of a sliver lining.

With growth so far below expectations, it is increasingly likely that the Bank of England will cut interest rates again, maybe as soon as next month.

Inflation is low - it has been below its 2.5% target for two years - leaving plenty of room for another fall in the cost of borrowing.

Jeremy Hawkins at Bank America says that could be good news.

"There is every possibility the Bank of England will cut again," he says, "and with that kind of monetary cushion around, prospects in the main are pretty positive."

The economy is also likely to get a boost from higher government spending, planned for the next few years, that could take up some of the slack left by industry.

Service sector optimism

Lastly, growth in the service sector has held up relatively well - crucial to the economy's health as it accounts for at least two-thirds of output.

Despite the sharp reduction in the hotel and catering business, growth in the sector as a whole remained at 0.7% in the first quarter, unchanged from the fourth quarter.

"Foot and mouth clearly had an impact on the tourism industry, so the underlying growth rate in services is even stronger than the headline number suggests," says Bank America's Jeremy Hawkins.

"These figures don't mean we should be jumping up and down in delight, but they do show the British economy holding up pretty well."

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See also:

27 Apr 01 | Business
UK growth at two-year low
25 Apr 01 | Business
Japan cuts growth estimate
25 Apr 01 | Business
EU downgrades growth estimate
27 Apr 01 | Business
US economy stronger than expected
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