UK growth meets Bank's expectations

Britain's economic growth rate in the first quarter came in line today with the Bank of England's forecast, reinforcing expectations that interest rates will stay unchanged for some months.

In the first quarter of 2006, the Office for National Statistics (ONS) said in a preliminary estimate that GDP growth stayed unchanged from the previous three months at 0.6%. The annual growth rate of 2.2% exactly matched the Bank's forecast in its February inflation report.

There was some evidence of the rebalancing in the economy that the Bank is anticipating as industrial output helped to offset softer consumer spending. Industrial output rose 0.7% in the first quarter, the strongest performance since late 1999.

In contrast, service sector output growth slowed from 1% in the last quarter of 2005 to just 0.6%, its slowest quarterly rate of expansion since the last quarter of 2004. The slowdown reflected weakness in the retailing sector.

But economists voiced doubts about the economy's ability to significantly rebalance itself.

"We ... are skeptical that business investment and exports will be able to substantially compensate for lacklustre consumer spending on an extended basis, thereby allowing the economy to significantly rebalance," said Howard Archer of Global Insight.

Although analysts expect rates to stay at 4.5% for a while given that inflation and growth are largely within target, some still anticipate that the next move will be down.

"Our view remains that inflation pressures remain well-contained and that consumer spending faces a number of headwinds, from a squeeze in disposable income and a turndown in the labour market," said John Butler of HSBC. "A long period of interest rates stability will eventually be broken by an interest rate cut."

The Bank estimates that growth this year will reach 2.7%, much higher than most City forecasts, which are close to the low 2% range.