UK economy stagnates

Spending in the services sector is slowing

The UK economy ground to a halt during the first three months of the year, according to new figures from the Office for National Statistics (ONS).

Essentially the UK economy was a whisker away from recession at the turn of the year

Philip Shaw, Investec

The ONS said UK gross domestic product (GDP) was "broadly unchanged" in the January to March period, compared to the previous three months. An earlier estimate had put growth at 0.1%.

The revision means the economy has failed to grow for two successive quarters, its weakest performance since 1991.

But there was evidence of a recovery in Thursday's strong retail sales figures.

They showed that people had gone back to their big-spending habits in April, with retail sales volumes in the UK rising at their fastest rate for more than two years.

Weaker

Even so, the GDP figures will be a blow to the Chancellor, Gordon Brown, because they suggest the economy is unlikely to grow at the rate he predicted in last month's Budget.

The ONS said the main reason for the downward revision was a lower estimate of service sector growth, particularly finance and business services which contracted by 0.2%, the first fall since the beginning of 1992.

The ONS said the financial sector declined as the volume of transactions on the stock market fell.

Business to business services also fell with declines in advertising, security, legal services, accountancy services, management consultancy, recruitment, architects and engineering services.

The downward revision was also caused by a weaker than estimated manufacturing performance.

Recession

Household expenditure growth slowed and retail sales grew at the lowest rate for 21 months, during the first quarter.

In last month's Budget, Gordon Brown forecast growth of between 2% and 2.5% for this year.

Philip Shaw, chief economist at Investec said it looked as though the chancellor's forecast would not now be met.

"Essentially the UK economy was a whisker away from recession at the turn of the year," he said.

"But we remain confident that with manufacturing sentiment on the rise and household spending continuing to be strong the recovery will proceed fairly strongly," he added.