UK economic growth rate slowing

The financial services sector has seen a slowdown

The UK economy grew at its fastest rate in three years in 2007, but growth slowed towards in the last three months as the credit squeeze took hold.

For the whole of 2007 the economy grew by 3.1%, said the latest data from the Office for National Statistics.

Yet between October to December the economy grew just 0.6%, its lowest gain since the third quarter of 2006.

The credit squeeze hit the financial sector hard in the last quarter, which saw its weakest growth in four years.

Meanwhile, manufacturing industry saw an expansion of just 0.4% between October and December, as the higher price and reduced availability of credit hit business activity.

US impact

Analysts said the slowdown in economic growth increases the likelihood still further that the Bank of England will cut interest rates next month to 5.25% from the current 5.5%.

We expect UK economic growth to continue to slow over the coming months in the face of major headwinds Howard Archer, chief UK economist at Global Insight

Despite the Bank warning that inflationary pressures remain, it is widely expected to cut rates to sooth economic jitters sparked by fears of a recession in the US and the knock-on impact this has had on UK and other global stock markets.

An interest rate cut would also help households struggling with their mortgage payments and recent hikes in energy bills.

Howard Archer, chief UK economist at Global Insight said the possibility of a recession in the US was the main threat to UK economic growth in 2008.

"We expect UK economic growth to continue to slow over the coming months in the face of major headwinds," he said.

"In particular, consumer spending seems certain to be increasingly pressurized by muted real disposable income growth, tighter lending practices, increased debt levels [and] a markedly softer housing market."