Britain’s economy slowed to a crawl in the second quarter, with growth dropping to the weakest for three years as housebuilding activity halted, official figures revealed this morning.

GDP growth in the three months to the end of June fell to 0.2 per cent, from the 0.3 per cent pace registered in the first quarter of the year, the Office for National Statistics (ONS) said.

The slowdown left Britain’s second-quarter economic performance as the worst since the start of 2005, when the economy also grew by 0.2 per cent. Growth was last weaker in the spring of 2001, at 0.1 per cent.

The economy’s annual pace of expansion was cut in the second quarter to just 1.6 per cent, from 2.3 per cent in the previous three months.

The latest slide in growth was deepened by the plight of the construction sector, where the housing market slump has undercut building activity.

Output from the construction industry fell by 0.7 per cent during the second quarter, in its biggest drop since autumn 2005.

The plunge in activity in the sector would have been worse but for a substantial rise in building for government infrastructure projects, the ONS said.

The woes of the housebuilding industry have been emphasised recently by building companies, such as Persimmon, Taylor Wimpey and Barratt Developments, taking a battering.

In recent weeks, many of Britain's largest housebuilders have been forced into renegotiating debt covenants with their banks and announced plans to lay off thousands of staff as demand for new homes fell.

Construction accounts for only about 6 per cent of the economy. However, growth in the second quarter was also hit by a sharp contraction in manufacturing and continuing weakness in the services sector, the engine room of the economy.

In a glimmer of hope that Britain may avoid sliding into recession, services growth picked up from the first quarter, rising by 0.4 per cent in the three months to June, 0.1 points stronger than its showing in the previous three months.

However, its annual growth rate fell to 2.1 per cent, the lowest since the final months of 1992 and down from 2.6 per cent in the first quarter.

In the latest symptom of the toll from the credit crunch, there was particular weakness in the business services and finance sector, which includes the City, with growth in these industries falling to only 0.1 per cent.

Within the services industries, however, the transport, storage and communications sector showed a 2.2 per cent rise in the quarter — the biggest increase since the autumn of 2000.

A 0.4 per cent fall in manufacturing’s output drove an overall 0.5 per cent decline in the industrial sector, which includes utilities companies, North Sea oil operation, and mining. Industry’s performance was the worst since the final quarter of 2005.

Economists said that the GDP figures could be vulnerable to being revised down further in coming months, and predicted that they set the stage for the economy to hit the buffers and grind to a halt in the second half of the year.

“We expect the economy to stagnate at best through the second half of 2008 and the early months of 2009 as consumers rein in their spending in the face of major headwinds and investment is pared back,” said Howard Archer, of Global Insight.

Paul Dales, of Capital Economics, said: “The 0.2 per cent rise in second-quarter GDP shows that the economy has weakened dramatically, even before the full impact of the credit squeeze and housing downturn has been felt. An outright recession is now our central scenario.”

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