The economy grew at its slowest pace for three years during the first quarter because of stuttering growth in the UK services sector.

GDP rose by 0.4 per cent in the first three months of the year, down from a 0.6 per cent increase in the final quarter of 2007, according to the Office for National Statistics.

The annual rate of growth slowed from 2.8 per cent in the fourth quarter to 2.5 per cent in 2008, below expectations of a 2.6 per cent rise.

The credit freeze weighed on the pace of growth in the UK’s services sector, which accounts for about 75 per cent of the country’s GDP. Growth slowed to 0.6 per cent.

Within services, finance and business services were hardest hit, with growth falling from 0.6 per cent to 0.4 per cent in the first quarter.

A weaker performance from mining and quarry firms also offset increases from manufacturers causing industrial output — accounting for 19 per cent of the economy — to shrink by 0.1 per cent in the opening three months of the year.

The Government forecasts that the economy will grow by between 1.75 per cent and 2.25 per cent this year, while most economists are more circumspect in their predictions.

Alan Clarke, UK economist for BNP Paribas, said: "Given the likely reverse in the strength of retail sales combined with continued deterioration elsewhere in the breakdown — particularly financial and real estate — growth is likely to be even slower in the coming quarters."

The gloomy figures will put more pressure on the Bank of England to consider a rate cut next month to boost the flagging economy.

Howard Archer, chief UK and European economist for Global Insight, the economic consultancy, said: "We expect the Bank of England to trim interest rates by a further 25 basis points to 4.75 per cent in June, and would not rule out a move as early as May if credit conditions remain tight."

David Kern, economic adviser of the British Chambers of Commerce, said: “Whilst the new figures do not signal a recession, they highlight the need for corrective action to ensure that the credit crunch and the squeeze on consumer spending do not worsen the downward pressures on the economy.

"We continue to urge the MPC [Monetary Policy Committee] to announce a modest cut in interest rates to 4.75 per cent in May.”

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