The British economy grew more quickly in the second quarter of 2005 but the rise in consumer spending slowed to its weakest annual pace in more than 10 years, official data showed on Friday. Second-quarter growth was revised up a tenth of a point to 0.5 percent after a 0.4 percent gain in the first three months of the year.
That took the annual rate of expansion up to 1.8 percent, its weakest in three years. While the revision brought growth more in line with the Bank of England's own forecasts, economists said policymakers would be worried that consumer spending had not yet picked up in any meaningful way after the sharp slowdown at the turn of the year.
"The continuing weakness of the consumer will be a concern for the Bank," said Michael Penn, economist at Merrill Lynch.
"Although there are signs of stabilisation in retail sales, with unemployment continuing to trend up, the consumer outlook remains uncertain."
The BoE cut interest rates earlier this month for the first time in two years to revive consumer spending after growing signs the economy's main driver in recent years had been knocked hard by higher borrowing costs and soaring utility bills.
While policymakers have suggested that further cuts are not imminent, many analysts say interest rates will have to come down further from their current 4.5 percent if growth is to pick up as much as the central bank has predicted.
"With few prospects of a genuine acceleration in activity, we still expect rates to come down again early next year," said Philip Shaw, chief economist at Investec.
Some economists said the composition of growth actually looked a bit better after years of imbalances between high government and consumer spending and low business investment and exports.
Exports surged 5.6 percent on the quarter, investment was up by 1.5 percent. Household spending, meanwhile, rose by just 0.2 percent in Q2 or 1.5 percent on the year - its weakest pace since the first quarter of 1995.
"The long-overdue rebalancing of the UK economy may have started in earnest," said Holger Schmieding, economist at Bank of America.
Inventories also subtracted from overall growth as the first quarter's huge build-up was not repeated, possibly boding well for economic expansion in further quarters as stocks are repleted.
Even so, finance minister Gordon Brown's growth forecast of 3.0 to 3.5 percent for this year looks hard to attain as the economy would have to expand by around 1.0 percent in the third and fourth quarters for that to be achieved.
For now that seems unlikely even if recovery in the eurozone boosts the British economy.
"We continue to believe that growth will remain sub-trend in the near-term, running at around a 0.4-0.5 percent quarterly pace," said George Buckley, UK economist at Deutsche Bank.