U.K. Growth Slows to Weakest Pace in More Than a Year

U.K. Growth Slows to Weakest Pace in More Than a Year

Jan. 23 (Bloomberg) -- The U.K. economy grew at the slowest pace in more than a year during the fourth quarter after a jump in credit costs hampered brokerage and computer services.

Gross domestic product increased 0.6 percent in the three months through December, the least since the third quarter of 2006, the government said in London today. The rate exceeded the 0.5 percent median forecast of 35 economists in a Bloomberg News survey. From a year earlier, the expansion was 2.9 percent.

Growth is forecast by economists to slow to 1.8 percent this year, matching the weakest pace since 1992, as the U.S. subprime mortgage crisis curbs consumer spending and halts a housing boom. Faster inflation may limit the Bank of England's ability to cut interest rates, Governor Mervyn King said.

``These figures are history,'' said George Buckley, an economist at Deutsche Bank AG in London. ``We are going to see a slowdown from now on. We expect a rate cut in February.''

Bank of England policy makers voted 8-1 to keep the interest rate unchanged at 5.5 percent in January, as inflation concerns led a majority to dismiss David Blanchflower's call for a reduction. The minutes suggested the U.K. central bank has less scope to lower rates as quickly as the U.S. Federal Reserve, which cut its rate by 0.75 percentage point yesterday.

Next Decision

All 30 economists in a Bloomberg survey from Jan. 18 predicted that the main U.K. interest rate will fall to 5.25 percent at the Feb. 7 meeting. The pound was at $1.9534 at 12:15 p.m. in London, down from $1.9606 yesterday.

``The Bank of England is not going to be as aggressive as the Fed,'' Holger Schmieding, head of European economics at Bank of America Corp. in London, said in an interview on Bloomberg Television. ``But the case for some cut is getting clearer.''

Growth in U.K. services, three quarters of the economy, slowed to 0.7 percent from 0.8 percent, led by the smallest expansion in business services and finance since the second quarter of 2003.

Services ranging from banking, share dealing and computer maintenance, accounting for 28 percent of the economy, grew 0.4 percent in the quarter, a third of the pace of the previous three months.

Industrial production rose 0.3 percent, with no change in manufacturing output, the statistics office said.

Rising oil and food prices may push U.K. inflation above 3 percent this year, the upper limit of the Bank of England's 2 percent target, even as growth slows sharply, King said.

Rate Cut

The central bank cut its main rate a quarter-point last month, and economists surveyed this month forecast a similar reduction in February to limit damage to the economy as consumers and companies find it harder to borrow money. King opened the way to further reductions, saying current interest rates are bearing down on demand.

The pace of expansion, which reached a three-year high of 3.1 percent in 2007, may slow to 1.8 percent this year, according to the average of independent forecasts compiled by the Treasury this month.

Growth in the fourth quarter slowed from 0.7 percent in the third quarter and matched the weakest pace since the July- September period 2005, when the economy grew 0.5 percent.

``The credit crunch is starting to hurt, impacting the services and financial sector,'' said Alan Clarke, an economist at BNP Paribas SA in London. ``In the next few quarters, the slowdown will spread more widely to the whole economy.''

Pressure on Brown

The worsening outlook piles pressure on Gordon Brown, whose Labour Party has fallen behind the Conservatives in opinion polls since he became prime minister in June. Opposition parties blame Brown for letting consumers build up record debts of 1.4 trillion pounds ($2.7 trillion) during his decade as finance minister.

The government faced criticism from the European Union today over the scale of the budget deficit, which economists say has limited its room to support the economy with tax cuts and more spending as growth slows.

The EU's executive arm in a report forecast a deficit of 2.9 percent of economic output in the year starting April, suggesting slower growth may push the shortfall through the EU ceiling of 3 percent.

Retailers Tesco Plc and Marks & Spencer Plc this month called for more U.K. interest-rate reductions amid mounting evidence that a slowdown is under way. Consumer spending accounts for two thirds of the U.K. economy, Europe's second largest.

House prices fell for a third month in January and values will continue to drop this year unless the Bank of England cuts interest rates further, Rightmove Plc said Jan. 21. Sports Direct International Plc, the U.K. sporting-goods retailer controlled by billionaire Mike Ashley, forecast ``increasingly difficult'' trading conditions over the next six months.

U.K. banks told the Bank of England they plan to make fewer loans to consumers and companies in the first quarter, threatening to deepen the economic slowdown, the central bank said in a quarterly survey conducted Nov. 19 to Dec. 12.

BLOOMBERG