Economy grinds to a halt

Britain's longest period of postwar economic expansion ground to a halt in the first three months of 1999 as last year's interest rate rises and the strength of the pound cut growth to zero, official figures showed yesterday.

It is the first time since the UK climbed out of the 1992 recession that quarterly growth has been stagnant. The slowdown has cut into corporate profits, which fell at their sharpest annual rate since the three-day-week hit British business in 1974.

Until the start of the year, the economy had been growing for 25 consecutive quarters, the longest expansion since the Office for National Statistics began keeping quarterly records in 1955.

But growth has slowed rapidly since Labour came to power in 1997 and put the Bank of England in charge of setting interest rates. In an attempt to avoid inflation taking off, the Bank's monetary policy committee progressively raised rates to a peak of 7.5% in June last year.

Most of the slowdown has come in the manufacturing sector, where higher interest rates have boosted the pound and priced British goods out of overseas markets. Manufacturing output fell by 0.9% in the first three months of 1999, its third quarterly decline in a row.

Initial estimates from the ONS had suggested that growth over the quarter was 0.1%, and the unexpected downward revision to zero brought renewed hopes that the Bank would cut the cost of borrowing further to prevent inflation slipping below the government's 2.5% target. Economists said that without further interest rate cuts, the slump in output would deepen and the chancellor could miss his projection for growth of between 1% and 1.5% this year.

"We doubt whether the overall policy stance is easy enough yet to generate a recovery in activity," said David Walton, a UK economist at Goldman Sachs.

"If rates remain unchanged, growth will disappoint."

Adam Cole, UK economist at HSBC markets, said: "Looking back over the last year we have had a rising pound, which has squeezed exporters, rising interest rates, which have squeezed consumer spending, and the government raising taxes and reining back on expenditure."

Manufacturing unions pleaded with the Bank not to put jobs at risk by ignoring the recession in industry. Roger Lyons of the MSF said: "The [Bank] must make at least a 0.5% cut in interest rates in June or we face a summer of jobs evaporating from British manufacturing."

The services sector, which has been propping up output, slowed sharply over the last three months, expanding by just 0.2%. Business services, which includes management consultants, insurance firms, advertising and recruitment, suffered a particularly sharp downturn, falling by 0.3% over the quarter, after recording growth of more than 1% a quarter for most of the last two years.

The widening trade gap has also proved a drag on growth. ONS statisticians said that without the rise in imports and fall in exports, output would have grown over the quarter by a healthy 0.5%.

Mr Cole said British companies were starting to suffer the second-round effects of the Asian crisis as cheap imports from the crisis-hit countries displaced British sales in the domestic market. "Now that these countries are credit-worthy again and have access to working capital they are beginning to exploit the huge increase in competitiveness they gained [from devaluing]."