LONDON, April 25 - The British economy grew at its weakest pace in a year in the first quarter of 2003 as output of the service industries slowed in the run-up to the war in Iraq, official figures showed on Friday. The Office for National Statistics said gross domestic product rose by 0.2 percent on the quarter and by 2.3 percent on the year, weaker the 0.3 percent quarterly rise expected by markets and 0.4 percent increase in the previous quarter. Gilts and interest rate futures rose quickly while sterling ticked lower after the figures as dealers bet that the weaker than expected outcome had increased the chances of the Bank of England cutting interest rates next month.
"Overall, almost certainly slower than the Monetary Policy Committee was assuming in its February forecast and maybe enough to swing more of them behind a rate cut in May," said Geoffrey Dicks, chief UK economist at RBS Financial Markets. The BoE last cut interest rates in February to counter the effects of slowing demand both at home and abroad. It has since left borrowing costs steady at a 48-year low of 3.75 percent though two of the nine-strong MPC voted for a cut in April. The ONS said there was little growth in any parts of the service sector, the main driver of the economy in recent years, while hotels and restaurants showed a marked decline, probably as tourism dried up ahead of the war. Services output rose by only 0.3 percent in the first quarter, down from growth of 0.5 percent in the fourth quarter and 1.2 percent in the third quarter, and the weakest in a year. The ONS said manufacturing output was estimated to have risen in the first quarter and that this was the first time that it has risen since the last quarter of 2000 if one ignores the distortion around the time of the extended Jubilee holidays last year. Total production, however, probably fell back as a result of decline in oil and gas and other extraction and energy supply output. Due to the later publication of March retail sales data this month, the ONS said the GDP estimate does not include this figure but uses an early estimate.//