22 July 2005, 14:17  UK Q2 GDP grows by sub-trend 0.4 pct

The slowdown in the UK economy was highlighted further this morning with official figures showing second quarter GDP growing below the long-run average for the second quarter in a row, and the industrial sector in recession. In its preliminary analysis of the second quarter, the office for National Statistics revealed that GDP rose by 0.4 pct, the same as the first quarter's rate and in line with analysts' expectations. As a result the economy has grown below the so-called trend rate of quarterly growth of 0.6 pct for the second consecutive quarter and means that the government's prediction of 3.0-3.5 pct growth this year is unlikely to be met, even with an improvement in the second half of the year. As recently as the second quarter of 2004, GDP grew by 0.8 pct from the previous quarter. Since then it has grown at or below trend. On a year-on-year basis, GDP was 1.7 pct higher, down on the 2.1 pct recorded in the first quarter but again in line with market forecasts. This was the lowest year-on-year growth since the first quarter of 1993, when it increased by 1.4 pct. A year ago, the UK was growing at an annual rate of 3.7 pct. Overall, today's news is likely to cement market expectations that the Bank of England will cut the cost of borrowing at its next rate-setting meeting in early August. The minutes to the July meeting of the Monetary Policy Committee showed four out of the nine members voting for a quarter point cut in the key repo rate to 4.50 pct. One of the main reasons they cited was the sharp slowdown in economic growth. A more detailed look at today's data showed that the industrial sector acted as a major drag on growth once again. Industrial production, which accounts for some 20 pct of the UK's GDP, is estimated to have decreased by 0.4 pct during the quarter from the previous quarter. This follows the 0.9 pct decline in the first quarter and means that the industrial sector is in recession. Though the statistics office does not subscribe to an official definition of recession, most commentators define it as two consecutive quarterly declines. The last time the industrial sector posted two consecutive output declines was the third quarter of 2003. Within industrial production, manufacturing slid by 0.7 pct, offset partly by a 1.4 pct increase in mining and quarrying and a 1.1 pct gain in electricity, gas and water supply. The main source of growth once again was the services sector, which accounts for 73 pct of GDP. Growth during the quarter was 0.6 pct, down on the 0.7 pct recorded in the first quarter. The slight deceleration in service sector growth came from transport and communication, business services and finance, and government and other services.

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