Hopes fade for lower rates

Expectations of an imminent cut in interest rates receded yesterday after official figures showed the economy put on a growth spurt between July and September.

A healthy performance from the services sector helped GDP growth in the third quarter reach a higher than expected rate of 0.7% - its strongest for more than two years.

As well as a 0.8% boost to services output, statisticians said manufacturing production had increased, after six quarters of continuous decline, though they did not put a figure on the rise in these preliminary data.

Minutes released earlier this week showed three of the nine members of the Bank of England's monetary policy committee were minded to cut interest rates at their latest meeting, but economists said yesterday the unexpectedly resilient growth picture could make them think again.

"The figures are surprising - we had expected a lower level of growth in services," said George Buckley, economist at Deutsche Bank. "I think they may look twice at having to lower rates in November now."

Analysts also pointed out that third-quarter growth may have been artificially inflated by the extra Jubilee bank holiday in June, which depressed output in the second quarter, leading to a bounce in the following three months.

Jonathan Loynes, of Capital Economics, estimated that "stripping this effect out, underlying GDP growth actually slowed quite sharply from 0.9% in the second quarter to just 0.4% in the third quarter."

Growth in 2002 as a whole now looks almost certain to fall well short of the Treasury's forecast of 2%-2.5%, on which the chancellor, Gordon Brown, has based his spending plans.

Ross Walker, of Royal Bank of Scotland, said the economy would have to hit a "completely unrealistic" 2.5% quarterly rate of growth in the last three months of the year - a pace not seen since 1979 - to reach even the bottom of Mr Brown's target range.

With growth in the volatile retail sector described as "modest," much of the impetus behind the 0.8% quarterly growth in services output seems to have come from "post and telecoms", boosting hopes that a recovery in the battered telecoms sector is already under way.

The British Chambers of Commerce welcomed the acceleration in growth as "good news for the UK", but its director-general, David Frost, warned that the undershoot against Mr Brown's projections "begs the question, where will the extra money for his spending plans come from?"

As well as weighing the prospects for UK growth, the MPC will be looking closely at the global economic outlook when they meet next month. Doubts about the strength of recovery in the US were exacerbated yesterday by the largest fall in durable goods orders for 10 months.

The Department of Commerce said orders fell by 5.9% in September, the steepest drop since November 2001.

"These numbers are very disturbing," said Dana Johnson, of Banc One in Chicago. "At best what you have here is a sputtering economy. The loss of momentum in the economy is showing clearly in the durable manufacturing sector."