LONDON, July 23: The British economy grew at its weakest annual pace in more than 12 years in the second quarter of 2005 as manufacturing fell into recession, reinforcing expectations of an interest rate cut next month.

The Office for National Statistics said on Friday gross domestic product rose by just 0.4 per cent in the three months to June. This was the same rate as the first quarter but weaker than the 0.5 per cent predicted by analysts.

That meant output was 1.7 per cent higher than a year earlier, its weakest rate since the first quarter of 1993 when Britain was just coming out of an economic slump.

If there were any doubt that the UK economy has turned for the worst, then the second quarter GDP data should clear that up, said Alan Clarke, economist at BNP Paribas.

But the world’s fourth largest economy probably still did better than mainland Europe where growth has nearly stalled.

Economists expect the 12-nation euro zone to register expansion of just 0.2 per cent when data are published next month. Economic powerhouse China, meanwhile, posted annual expansion of nearly 10 per cent in the first half of 2005.

Experts expect the Bank of England, however, to take action to revive consumer demand. Interest rate futures rose as traders became ever more certain that borrowing costs would fall from their current 4.75 per cent in August.

It confirms the view that a 25 basis points rate cut next month is still on the cards, said Peter Dixon, economist at Commerzbank.

The European Central Bank, meanwhile, is expected to keep interest rates on hold at 2.0 per cent, where they have been for about two years.

The ONS said quarterly growth was driven by the service sector which accounts for nearly three-quarters of the economy and expanded by 0.6 per cent in the second quarter, a weaker rate than in the first.

Within that, the hotels, distribution and restaurant category expanded by 0.5 per cent and was up 0.9 per cent on the year, the weakest rate in 10 years.

Manufacturing output fell by 0.7 per cent following a 0.9 per cent fall in the first quarter, meaning the sector is now in technical recession.

Second quarter growth is also now much weaker than the 2.55 per cent annualised pace predicted for the quarter by the BoE in its May Inflation Report, although that forecast was made before significant revisions to GDP data last month.

British finance minister Gordon Brown’s forecast for 3.0 to 3.5 per cent growth is also looking shaky, potentially putting more pressure on already strained public finances.

Achieving the forecast would require a big pick-up in the second half but that seems unlikely with manufacturing hardly in a position to drive growth and consumer demand looking even more vulnerable after this month’s terrorist attacks in London.

We think economic growth is going to stay around this level which means rates could be cut another 50 basis points by early 2006, said George Buckley, UK economist at Deutsche Bank, who already predicts a quarter point reduction for August.

—Reuters