London, April 26 (Bloomberg) -- Britain's economy barely grew in the first quarter, giving the Bank of England time to wait before raising interest rates. The world's fourth-largest economy expanded 0.1 percent in the first three months of the year and 1 percent from a year ago, the government said. The annual growth was the slowest in a decade. Service industries account for two-thirds of the economy, and they grew 0.5 percent in the quarter. That's still down from 1.2 percent a year earlier, while manufacturing remains mired in its worst slump since 1991. With service growth slowing, the central bank will probably wait to reverse last year's rate cuts, which took its benchmark rate to a 38-year low. ``Manufacturing is in a recession,'' said Ken Podmore, the owner of Centreless Machine Tools Ltd., which reconditions tools for automakers in Birmingham, England. ``Breakdowns and repairs are keeping me going. It's more lucrative to sell machines, but that's not happening at the moment.'' The first quarter's slow growth comes after no change at all in the fourth quarter. Economists had expected a 0.4 percent gain for the first three months and a 1.3 percent expansion from a year earlier. Another report today showed economies in continental Europe may be weaker than expected, as well. A final report on France's GDP for the fourth quarter showed the continent's second-largest economy shrank 0.3 percent during the quarter, more than the 0.1 percent drop reported two months ago.

U.S. Key
The key to Europe's growth will be a recovery in the U.S., which also reports first-quarter GDP today. That report is expected to show the U.S. economy, the world's largest, grew at an annual rate of 5 percent during the quarter, the fastest pace since the second quarter of 2000 and almost three times the growth it managed in the fourth quarter of 2001. The U.K. sells about 14 percent of its exports to the U.S., which is the largest foreign investor in Britain. A recovery there could help the British economy, pushing rates up faster. ``The economy has been virtually stalled since the end of the third quarter,'' said James Shugg, an economist at Westpac Banking Corp. ``For us, this is the straw that broke the cammel's back. We've moved away from the idea the bank would tighten by July. They'll tighten in August at the absolute earliest, and more likely in the fourth quarter.''

Changing Expectations
The central bank reduced its benchmark lending rate 2 percentage points last year in seven steps, to 4 percent. Rates probably will rise beginning in August, finishing the year at 4.75 percent, according to the median forecast of 36 economists surveyed by Bloomberg News last week. Only two of those surveyed expect the first move at the next meeting, on May 9. Futures markets show investors are starting to revise their expectations the first increase is coming soon. The rate on the three-month Libor contract maturing in June fell to 4.27 percent after today's report from 4.28 percent yesterday. For December contracts, it slipped to 4.95 percent form 5.01 percent. Bonds gained after the report. The 5 percent note due in June 2004 rose 0.05, or 50 pence per 1,000-pound ($1,450) face amount, to 100.43. Its yield fell to 4.78 percent, the lowest level since March 1, from 4.81 percent. Bank of England Governor Sir Edward George has said rates may have to rise this year, though no move is ``imminent.'' His deputy, Mervyn King, said earlier this week that a recovery isn't ``entrenched,'' suggesting no reason to boost rates yet. U.K. growth probably will average 1.9 percent this year and accelerate to 2.2 percent next year, the 30 nation Organization for Economic Cooperation and Development said. The Bank of England said in its quarterly inflation report, released in February, that it expects GDP growth of 1.37 percent in the first quarter and 1.48 percent in the second.

Still Spending
With unemployment at a 26-year low, British consumers are still borrowing at record rates to finance higher spending. House prices rose 16 percent in the year to March, almost the strongest pace since 1988. Retail sales rose 5.6 percent from a year ago in March as shoes and clothes sold at their fastest rate since 1986. Arcadia Group Plc, Britain's second-biggest clothing chain, said consumer demand produced a profit in the 26 weeks to Feb. 24 after a loss a year ago. Debenhams Plc, the U.K.'s No. 2 department store, said earnings rose 17 percent in the six month to March 2. The central bank helped stoke that strength by cutting interest rates last year. Lower costs to service debt helped encourage consumers to buy new homes. Mortgage lending reached a record 4.1 billion pounds ($6 billion) last month, the British Bankers' Association said.

Service Growth
Service industries grew 2.4 percent from a year ago. That compares with a gain of 0.5 percent in the fourth quarter, when annual growth was 3.1 percent. The government gave no estimate for industrial production, though it said manufacturing production fell from their fourth- quarter levels. Manufacturing accounts for a fifth of the economy; it declined 1.9 percent in the fourth quarter, and 5.8 percent from the same quarter a year earlier. Today's report is the first of three estimates of gross domestic product. The second estimate, in May, will contain the first estimates of manufacturing growth.