Companies call for rate cut to push UK growth

Britain's hard-pressed companies last night called for action, not words, from the Bank of England to stimulate the economy after a slump in factory output and sluggish consumer spending left the domestic economy at its weakest since the uncertainty caused by the build-up to the 2003 invasion of Iraq.

The British Chambers of Commerce expressed alarm at the government's official growth figures for the first quarter and urged the Bank's monetary policy committee to cut interest rates.

"Consumer spending growth remains disturbingly weak. Against this worrying background the monetary policy committee should no longer discuss interest rate increases and instead actively consider early interest rate cuts," said David Kern, the economic adviser to the BCC.

The City also expressed concern at the gross domestic product data, noting that 0.4 points of the 0.5% growth in the first quarter was accounted for by trade, with only a negligible 0.1% increase in domestic demand. Analysts said the trade improvement was not the result of a long-awaited surge in UK exports but the outcome of imports falling more sharply than exports in the first three months of the year.

Following fresh information of the poor state of manufacturing, the Office for National Statistics revised growth in GDP down from 0.6% to 0.5% in the first quarter. It was the weakest expansion since the second quarter of 2003.

The annual growth rate was was also nudged down from 2.8% to 2.7%, and with a further period of weakness anticipated in the second quarter, City analysts said Gordon Brown's budget forecast of between 3% and 3.5% growth this year looked increasingly unlikely.

Jonathan Loynes, the chief UK economist at Capital Economics, said the economy would have to grow by 1% in each of the remaining three quarters of 2005 to meet the chancellor's prediction.

The ONS had originally believed that factory output grew by 0.1% in the three months to March but yesterday said it now estimated production to have fallen by 0.7%. Activity in the service sector - which grew by 0.8% in the quarter - helped offset the problems of industry, with architects, consulting engineers and estate agents doing particularly well.

Household spending, which accounts for more than half the economy, rose a modest 0.3%, following an even weaker 0.2% in the last quarter of 2004. That brought the annual rate of increase down to 2.0%, the lowest in four years.

The ONS said there was little change in the other components of demand. Government spending added 0.1 points to growth between January and March, investment was flat, while a smaller increase to stocks subtracted 0.1 points from demand.

John Butler, an HSBC economist, said: "All the growth was driven by the public sector, contributing 0.1 percentage points to quarterly GDP growth, and net trade, which contributed 0.4 percentage points. What's more, the only reason net trade boosted GDP growth was because imports contracted more sharply than exports. This clearly shows the slowdown in the UK domestic picture has been more abrupt than the slowdown in global demand."

On Tuesday, Richard Lambert, an MPC member, said there was a risk consumer spending would not recover as expected. He said that in the light of recent data, it was not obvious rates were too low to achieve the 2% inflation target.