Weaknesses ahead for UK economy

The figures revealed surprisingly weak consumer spending

The UK economy grew by 0.6% in the last three months of 2007, figures have confirmed, but the quarter saw a sharp slowdown in consumer spending.

Consumer spending grew by just 0.2% in the three months, compared with growth of 0.9% in the previous quarter, the Office for National Statistics said.

Analysts said the more detailed data supported the view that the UK is set for much slower growth this year.

Many economists expect interest rates to be cut further in the coming months.

While we expect the UK to avoid recession, we believe it will see an extended period of markedly below-trend growth Howard Archer, Global Insight

"The breakdown looks a bit weak for want of a better word," said Jonathan Loynes, chief UK economist at Capital Economics.

"It supports the view that growth will slow in the first quarter and beyond."

Inventory build-up

Analysts said growth in the quarter would have been considerably slower had it not been for a £3.1bn jump in inventory levels - the biggest rise for 20 years.

The expectation is the build-up of inventories of unsold goods will act as a drag on future production levels in the early part of 2008.

The 0.6% growth in gross domestic product (GDP) for the final quarter of 2007 was down from 0.7% growth in the previous three months.

Growth in the service sector slowed to 0.6%, from 0.9% in the previous quarter, as the credit crunch hit business services and the finance sector.

Slower growth ahead

The ONS figures showed that the level of GDP in the fourth quarter was up by 2.9% from the same quarter in 2006. Over 2007 as a whole, GDP grew by 3.1%

Many analysts are now forecasting that the UK economy will grow by about half that rate in 2008..

"While we expect the UK to avoid recession, we believe it will see an extended period of markedly below-trend growth," said Howard Archer, UK economist at Global Insight.

The Chancellor will reveal his latest economic forecast on 12 March during the Budget. The Treasury is currently forecasting UK growth of 2% to 2.5% this year.

In February, the Bank of England cut UK interest rates to 5.25%, its second reduction since December, and it is expected to lower rates further this year, despite worries over inflation.

Earlier in the week, Deputy Bank of England governor Rachel Lomax warned of "significant risks to the downside" for UK growth due to the "severe liquidity crisis" in the banking sector.