UK economy grows at slowest pace in three years

Britain's economy grew at its slowest pace in three years in the first quarter as stronger household spending failed to offset weaker industrial output and a sharp fall in business investment.

The Office for National Statistics confirmed that the economy grew an unrevised 0.4 per cent in the first three months of the year, leaving the annual rate at 2.5 per cent.

Analysts had not expected a revision and there was little market reaction. Despite slowing growth, inflationary pressures are rising and money markets have completely priced out the chance of any further interest rate cuts this year.

A breakdown of the data showed a strong recovery in household spending, which rose 1.3 per cent on the quarter, up from 0.1 per cent in the last quarter of last year. This reflected strength in official retail sales data which has diverged from weaker survey evidence.

The statistics office said spending has also been boosted by strong car sales and demand for lottery tickets due to an unusually big jackpot.

"We don't trust the supposed surge in consumption over the quarter so second quarter looks like it is going to reveal a further slowdown in the economy," said Philip Shaw, an economist at Investec. "Uncertainty is the watchword on interest rate prospects."

The broad picture was much weaker, however, with services growth and production activity both revised lower. The services sector grew 0.5 per cent on the quarter, its weakest performance in three years.

Gross fixed capital formation, a measure of business investment, fell by 1.6 per cent on the quarter, its biggest drop in five years. That reflected a sharp fall in commercial building and homebuilding as the property market weakened.