Slowing GDP growth increases chances of interest rate freeze

The chances of an interest rate increase next monthhave been weakened by a leading independent forecaster which said the economy had slowed sharply over the latest quarter.

GDP growth has slowed from 0.7 per cent in the second quarter to 0.4 per cent in the three months to September, the National Institute of Economic and Social Research said today.

If this is confirmed by official figures later this month, it would signify the weakest three-month growth rate for more than a year.

The report will offset separate figures showing that British factories had enjoyed their longest stretch of unbroken growth since 1999 when the high-tech boom was nearing its peak.

The NIESR said its downward revision was partly based on the report by the Office for National Statistics showing services output fell by 0.3 per cent in July. "Our estimate of slow growth in the third quarter of the year reduces the chance that interest rates will be increased in November, although we continue to expect a further rise eventually," said Martin Weale, the institute's director.

However, he said that, if service sector output growth had resumed, it was likely that the rolling quarterly growth rate from October to December would rise above trend again.

The ONS said manufacturing output rose by 0.5 per cent in August, following increases in May, June and July.

The ONS confirmed it had passed the figures to the Bank of England's Monetary Policy Committee ahead of its decision on Thursday to leave interest rates unchanged.

However, the strong performance was offset by a seasonal slump in the wider production industry because of maintenance on North Sea oil rigs. Analysts said this meant GDP in the third quarter would probably slow from the above-trend 0.7 per cent posted in the three months to June.

Analysts said a rebound in the North Sea combined with continued growth in activity on the factory floor in September could deliver a strong end to the quarter.

"The September survey evidence from the CBI and purchasing managers is upbeat, indicating manufacturing is continuing to benefit from healthy domestic and foreign orders," said Howard Archer, chief UK economist at Global Insight.

James Knightley, economist at ING Financial Markets, said: "Overall, this is a healthy report that should add further weight to the case for a quarter-point rate hike in November."

The ONS said growth was led by the electrical and optical sector, which was in the vanguard the last time manufacturing posted four months of successive growth between May and September of 1999.

Pharmaceuticals, which is another R&D-intensive sector, also posted a healthy increase. However, not all analysts were convinced by the optimism of a continued recovery in manufacturing.

John Butler, HSBC chief UK economist, pointed out the sector was still under-performing other economies. "Despite the rebound in consumer activity, UK manufacturers are still not benefiting," he said.

"The level of production of consumer goods is unchanged over the past three months and, in fact, the production of consumer durables has contracted in each of the past four months."

The financial markets showed little reaction, as most analysts believe the outcome of November's decision will be driven by a flurry of data due out later this month. The week after next will see data on inflation, the labour market, retail sales, public finances and the first estimate of GDP for the third quarter.