Fears that an abrupt consumer downturn will undercut the economy grew yesterday after confirmation that households' spending growth virtually ground to a halt at the end of last year as fretful Britons boosted their savings.

Updated official data showed that a sharp retreat by Britain's previously irrepressible consumers saw growth in their spending slump to a two-year low of 0.1 per cent in the final quarter of last year (Q4). This was just half the pace previously estimated, and drastically down from 0.8 per cent gain in the previous quarter.

The bleak figures stoked market speculation that a cut in interest rates could come as soon as next month, piling further pressure on the pound. Sterling tumbled to a record low against the euro, which was driven to its highest level against the pound to date, rising to 79.28p. The pound also sank back below $2.00.

The sharp fall in consumer spending came as Britons also moved to increase their savings, in what may be a symptom that anxieties over the economic outlook, and a deepening housing market downturn, are taking a toll on sentiment.

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Background

• Oil is the key to world recovery

• Banks may need to pump billions into scheme

• UK economic growth weakest for three years

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Background

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The savings ratio, the main official measure of how much households put aside from their incomes, jumped in Q4 to 3.3 per cent - up from 2.6 per cent in the previous three months, although still at relatively low levels.

Consumer confidence fell to its lowest for a decade and a half. The headline index of sentiment from GfK NOP dropped to minus 19, its worst since February 1993.

The sharp weakening of household spending growth in Q4 combined with a downgrade of government spending — now shown to have fallen by 0.5 per cent in the quarter compared with the 0.9 per cent rise initially recorded — to cut the estimated growth of the economy to 2.8 per cent in Q4, down from the previous 2.9 per cent estimate to the weakest since spring 2006. Quarterly growth was unrevised at a still robust 0.6 per cent.

The slide in consumer demand came despite a rise in households' disposable incomes, after inflation, by a revised 1.3 per cent in Q4, lifting their annual pace of increase to 2.6 per cent.

In a mixed set of figures, companies' gross operating surpluses, a GDP-based measure of profits, rose 3.3 per cent in Q4, compared with a previous estimate that they had stagnated.

Yet City economists said that the figures again emphasised the vulnerability of growth. Ross Walker, of RBS Global Markets, noted that one third of domestic demand in Q4 was accounted for by company stocks piling up, and the effect of a sharp fall in imports on Britain's trading performance.

Accidental benefit of the credit squeeze

— The impact of the credit squeeze on the City was made clear by balance of payments figures. The current account deficit shrank in Q4 to £8.5 billion, or 2.4 per cent of GDP, after having shocked the City by leaping to £19.1 billion (5.5 per cent) in the previous quarter

— The sharp improvement in the figures was mainly because of a precipitous £10 billion drop in earnings on investments by foreign companies based in Britain. That decline was largely the result of a plunge in foreign banks' earnings from derivatives trading

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