UK economy stalls again

LONDON, England -- The UK economy failed to grow at the start of the year for a second consecutive quarter, raising concerns over the pace of recovery and cooling expectations of an imminent rise in interest rates.

A surprise downward revision by the Office for National Statistics showed the economy registered zero growth in the first three months of 2002 following flat growth in the previous quarter. It was the first time since 1991 that the economy did not grow for two quarters in a row.

Economists had been expecting an upward revision in the original first quarter estimate of 0.1 percent growth in gross domestic product.

The ONS also revised its year-on-year GDP growth to just 1 percent -- the weakest annual growth rate since the fourth quarter of 1992, when the economy was emerging from its worst post-war recession.

"It just goes to show how close the UK was to recession at the turn of the year," Phil Shaw, an economist at Investec Bank, told Reuters.

The ONS said the downward revision was due mainly to a lower growth estimate for the service sector, particularly finance and business services which contracted by 0.2 percent.

While the surprise revision in GDP is cause for concern over the strength of the UK economy, many believe it is still on a recovery course.

"Slower growth in the first quarter of 2002 reflects the slowdown in the world economy and the effects on increased uncertainty following September 11," a spokesman for the UK Treasury told Reuters.

"There are now clear signs of improving confidence and activity in the U.S. and Europe and we expect UK growth to accelerate through the year as the recovery in the world economy gathers pace."

Still, the weaker than expected economic numbers are expected to leave the Bank of England's Monetary Policy Committee with less room to move when it meets to decide on interest rates on June 6.

The BoE has been widely expected to start raising borrowing costs soon -- possibly at the June meeting -- after cutting interest rates seven times last year as the economy floundered under the gobal recession. Its key rate is now at a 38-year low of 4 percent.

"We still look for the first [interest rate] tightening in July, but would put a 40 percent risk of a move next month," Jeremy Hawkins, an economic at Bank of America, told Reuters.