UK Economy Loses Momentum in First Quarter

Britain's economy grew at its weakest rate in three years in the first quarter as the credit squeeze took its toll and energy output contracted, official figures showed on Friday.

The Office for National Statistics said the economy grew 0.4 percent in the first three months of the year, in line with expectations and down from 0.6 percent in the final quarter of 2007.

"We suspect that growth will continue to soften through the rest of the year," said James Knightley at ING.

"The effects of the credit crunch, which is raising the cost of borrowing...suggest that activity will continue to moderate."

The annual growth rate slipped to 2.5 percent, slightly below the consensus forecast of 2.6 percent, from 2.8 percent previously.

The figures show the economy is now growing below trend, potentially giving the Bank of England more leeway to cut interest rates.

However, policymakers have indicated some slowing of the economy is necessary to curb inflationary pressures, so further rate cuts are likely to be gradual.

"While overall growth has fallen from the heady rates of 2006-07, the decline thus far has been moderate," said George Buckley, chief UK economist at Deutsche Bank.

A breakdown of the figures showed a deceleration across most sectors.

There was an outright decline in industrial production, which fell 0.1 percent on the quarter as a sharp fall in energy output more than offset a recovery in manufacturing.

Service sector growth decelerated to 0.6 percent on the quarter from 0.7 percent in the final quarter of last year.

Within that, growth in business services and finance slowed to 0.4 percent -- the weakest rate in almost five years.