Consumer spending growth dashes rate cut hopes

Household spending is growing at its fastest pace in 18 months, official figures revealed yesterday, dashing hopes that the Bank of England may cut rates again to rescue manufacturers from recession.

The economy grew by 0.3% between April and June - the slowest pace of growth since the last quarter of 1998. In its breakdown of activity in the second quarter, the ONS said the gap between recession-hit manufacturing and the rest of the economy was widening.

While manufacturing output shrank by 2% as firms reduced stockpiles of unsold goods, growth in the service sector, some two thirds of the economy, was revised up to 0.8% from 0.6%.

Analysts said the gap reduced the chances of the Bank cutting borrowing costs from their present level of 5%. "These data provide strong support for rates staying on hold in the near term. The extent to which the slowdown has spread to the service sector seems to have been exaggerated," said Danny Gabay of JP Morgan.

Retailing and other services are being kept afloat by the strength of consumer spending, which rose by 1.2% over the quarter, the largest increase since the end of 1999.

"The contrast between the strength of private [and public] consumption and the weakness of manufacturing could scarcely be more marked," said Geoffrey Dicks, UK economist at the Royal Bank of Scotland.

The continued strength of consumer spending is likely to set alarm bells ringing at the Bank of England. Three members of its nine-strong monetary policy committee opposed its decision to cut rates earlier this month, warning lower borrowing costs would only exacerbate imbalances in the economy.