Britain's economy grew at its weakest pace in three years in the second quarter of this year, official data showed on Friday, but few analysts are betting interest rates will fall any time soon.
The risk of the first recession since the early 1990s is growing but living costs are also surging, making it hard for Bank of England to cut rates and stoking public dissatisfaction with the Labour government's handling of the economy.
Rates are expected to fall eventually but that may come too late to offer any economic relief to Prime Minister Gordon Brown, who looks on course to lose the next election after Labour lost one of its safest parliamentary seats on Friday. Construction only makes up 6 percent of the economy but the much bigger service sector - which constitutes 74 percent of GDP - is also slowing dramatically.
The services sector grew just 2.1 percent compared to the same quarter last year - the weakest annual growth since 1992, when the economy was emerging from the last recession. While a recession - two successive quarters of contraction - remains an outside bet for many economists, the BoE is expecting the growth to slow more sharply than it forecast in May. But it also expects inflation to spike higher.
Energy supplier EDF said on Friday it was hiking its power and gas prices by about a fifth. Others are expected to follow suit. Inflation is already running at nearly double the central bank's 2 percent target because of soaring fuel and food prices. One policymaker - Timothy Besley - even considered raising rates this month to counter the inflation threat. BoE Deputy Governor Charles Bean said late on Thursday that much would now depend on the central bank's new forecasts due next month.
"We continue to think the Monetary Policy Committee will avoid raising rates over the summer, but a rate cut is a long way off," said Philip Shaw, chief economist at Investec. That leaves little to stop a sharp economic slowdown. Bellwether retailer John Lewis added to the gloom on Friday, reporting subdued sales as consumers cut back on spending.
With the housing market sliding and the credit crunch spreading out from the hard-hit financial sector, Britons are growing increasingly uneasy about keeping Labour in charge when the next election - due by May 2010 - comes around. In the strongest sign of that disillusionment yet, Brown's party suffered a shock defeat on Friday in a vote for a vacant parliamentary seat in his native Scotland that had been regarded as one of Labour's safest.