Page last updated at 09:25 GMT, Friday, 25 July 2008 10:25 UK

UK economic growth slows sharply

Woman passing a shop in London with a sale on
The credit crunch is taking its toll on consumer spending

The UK economy grew 0.2% in the second quarter of the year, as the credit crunch took its toll on the housing market and consumer spending.

The figure is the lowest growth quarter-on-quarter for three years.

It grew 1.6% on the same quarter a year ago, also the weakest growth for three years, and much lower than the 2.3% growth seen in the first quarter.

Economists had expected GDP growth to slip to 0.2%, and some are warning that a recession is likely.

Housing slowdown

The Office for National Statistics (ONS) said the slowdown was driven by the 0.7% fall in construction output, the biggest drop since the third quarter of 2005.

An outright recession is now our central scenario
Paul Dales, UK economist, Capital Economics

Construction companies have announced several thousand job cuts in recent months as the housing boom has stumbled to a halt.

The construction sector only accounts for 6% of the economy.

Industrial production has also fallen 0.5% in the quarter, the second successive drop.

And crucially, the service sector, which constitutes 74% of GDP, has also slowed. Output in the services sector rose 2.1% on the same period a year ago, the weakest annual growth since 1992.

Within the services sector, the transport, storage and communications category rose 2.2% on the quarter, the biggest rise since 2000.

Recession fears

The latest data heightens fears that the UK economy could enter a recession, and recent surveys by the CBI indicate that manufacturing output is likely to fall further.

How the slowing economy is affecting the British Bathroom Centre

Paul Dales, UK economist at Capital Economics, said: "An outright recession is now our central scenario. With industrial production having fallen in both Q1 and Q2, industry is already in recession.

"Looking ahead, the more up-to-date surveys suggest that in Q3 so far, overall economic growth has ground to a complete halt."

Interest rates will eventually need to fall, he added. "The recent drop in the oil price and the price wars on the petrol forecourts support our view that the next rate cut could come late this year, but this will be too late to prevent a recession," he said.

Added ING's James Knightley: "In terms of the outlook, we look for even weaker growth and possible contraction in Q3 and Q4."

Future decisions on interest rates also hinge on inflation, with rising oil and food prices pushing costs up across the world.

Alan Clarke, at BNP Paribas, said: "Growth has been much worse than (the Bank of England) expected. What really counts is what that does to the two-year ahead outlook for inflation."


SEE ALSO

RELATED INTERNET LINKS
The BBC is not responsible for the content of external internet sites


FEATURES, VIEWS, ANALYSIS
Has China's housing bubble burst?
How the world's oldest clove tree defied an empire
Why Royal Ballet principal Sergei Polunin quit

BBC iD

Sign in

BBC navigation

Copyright © 2018 BBC. The BBC is not responsible for the content of external sites. Read more.

This page is best viewed in an up-to-date web browser with style sheets (CSS) enabled. While you will be able to view the content of this page in your current browser, you will not be able to get the full visual experience. Please consider upgrading your browser software or enabling style sheets (CSS) if you are able to do so.

Americas Africa Europe Middle East South Asia Asia Pacific