UK growth slows down

The economy grew at its weakest rate in nearly two years in the first quarter, official figures showed today, striking a blow to Gordon Brown's forecasts.

The Office for National Statistics (ONS) said gross domestic product rose by 0.5% in the first three months of the year, a tenth of a point lower than estimated last month. Output was 2.7% higher on a year earlier.

Household spending increased by just 0.3% on the quarter, bringing the annual rate of increase to 2%, the lowest in four years. Softer consumer spending has emerged as a key danger for the economy.

Amid concern at a greater than anticipated slowdown in consumer demand, the Bank of England this month left rates unchanged at 4.75% for the ninth month running. The City believes that rates have peaked and will come down next year, possibly to 4%.

Richard Lambert, one of the Bank's policy makers, said yesterday there was a risk that consumer spending would not recover as the Bank expected in its central forecast. In addition, he said he did not think it was obvious that interest rates were too low.

Analysts have expressed concern that other areas of the economy will fail to pick up the slack as consumers curb spending.

"Household expenditure was subdued as expected, but there were disappointing falls in business investment and exports," said Howard Archer of the consultancy Global Insight.

"There is a very real risk that consumer spending will be muted for an extended period without any other areas of the economy compensating significantly for this."

The latest figures will cast doubt on the chancellor's growth forecasts. Mr Brown has pencilled in growth of 3-3.5% for this year, a forecast well above most private predictions.

The Organisation for Economic Cooperation and Development, the Paris-based thinktank, predicted British GDP growth of 2.4% this year.

"Certainly, the chancellor's projection of 3-3.5% expansion now looks like deeply wishful thinking, and he is clearly going to have some difficult tax and spending decisions to make come next year's budget," Mr Archer said.