28 October 2002, 09:03  European Economies: U.K. Economic Growth Accelerated to 0.7%

/www.bloomberg.com/ By Julia Kollewe
London, Oct. 25 (Bloomberg) -- U.K. economic growth accelerated in the third quarter, helped by the lowest borrowing costs in almost four decades.
Gross domestic product rose 0.7 percent from the previous three months, the government said, from 0.6 percent in the second quarter. From a year ago, the economy grew 1.7 percent. Services expanded at a faster pace and manufacturing gained.
``We're seeing greater orders,'' David Newton, managing director of Foremost Packaging Ltd. in Paignton, England, a maker of plastic packaging for food and phones, said in an interview. ``Low interest rates are helping.''
The Bank of England reduced rates seven times last year to a 38-year low of 4 percent and three policy makers voted for a cut this month. That's helping Britain expand quicker than most of the world's largest economies.
Today's figures are the first growth estimates for the third quarter among the Group of Seven major industrial nations. German growth stagnated at 0.3 percent in the second quarter, Italy expanded 0.2 percent and French gross domestic product rose 0.4 percent. The U.S. economy grew at an annual rate of 1.3 percent.
Economists had predicted growth of 0.6 percent. The pound rose against the dollar. The currency rose to $1.5530 at 12:20 p.m. London time, compared with 1.5480 late yesterday.
``These are pretty strong numbers,'' said Mike Lenhoff, chief strategist at Brewin Dolphin Holdings Plc., which manages about 14 billion pounds. ``Maybe even the three who voted for a rate cut last time round will change their minds.''
Services Gain
Banks, retailers, insurers and other services companies -- more than half of the economy -- grew 0.8 percent, compared with 0.6 percent in the second quarter.
Business services led the gains, along with post and telecommunications, a category that includes mobile phone service. Today's report, the first of three estimates of growth during the quarter, included no figures for most industries.
One category where statistics were available, hotels, distribution and catering, grew 0.3 percent in the third quarter from the second.
For retailers, the government's statistics office estimated ``modest growth'' for the third quarter. Expansion was slow when compared with previous quarters, which have usually posted growth of more than 1 percent, the statistics office said.
Reports from companies are mixed. Matalan Plc said this week sales growth accelerated for the first time since January after Britain's largest discount-clothing retailer added fashions and stores. Harvey Nichols Plc, a luxury store chain, said first-half sales at stores open a year or more fell 2.9 percent from a year ago.
Manufacturing
Manufacturing, which accounts for about a fifth of the economy, expanded after six straight quarters of decline, the government said. The largest gains came in transport equipment, after auto production rose in August.
Factory production dropped 0.7 percent in the second quarter largely because of two extra days of holiday granted for Queen Elizabeth II's Golden Jubilee. No figure is yet available for the third quarter.
Without the drop in the second quarter and the subsequent rebound in the third, the economy would have grown faster in the second and slower in the third quarter, the statisticians said.
``With growth holding up, this does reduce the possibility of a November rate cut,'' said Katherine Shepperd, an economist at J.P. Morgan Chase & Co.
Interest Rates
Yields on interest rate futures contracts were little changed after the figures were released. The three-month Libor contract due in December was unchanged at 3.88 percent. The yield on the March contract dropped one 1 basis point to 3.91 percent. A basis point is 0.01 percentage point.
Consumer spending helped compensate for the slump in manufacturing earlier this year and in 2001, preventing the U.K. from following the U.S., Germany and Japan into recession.
Some Bank of England policy makers are concerned that may change. ``Without a pre-emptive repo rate reduction now, domestic demand growth might fall faster than currently envisaged, leaving inflation below target for longer,'' said the three who voted for a cut at the Oct. 10 meeting, according to the minutes.
Confidence among Britain's manufacturers fell for the first time since January and factory orders worsened this month, a survey by the Confederation of British Industry showed this week.

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