Housing slump hits economic growth

The economy expanded by just 0.2% between April and June - the slowest pace since the first three months of 2005, although in line with City forecasts.

But the impact of the credit crunch on a struggling housing market was underlined as construction output fell by 0.7% due to a "particularly large" fall in new housebuilding, according to the Office for National Statistics' (ONS) first estimates.

A raft of the UK's housebuilders have shelved new projects since March as would-be buyers struggle to get mortgages because lenders hit by the credit squeeze have hiked borrowing costs. In recent weeks, builders have axed around 5,000 jobs as the market heads downwards.

The figures come amid fears of recession after recent industry surveys signalled contracting activity in construction, services and manufacturing sectors during June.

The annual rate of growth in gross domestic product also slowed to 1.6% - again the lowest for three years, the ONS estimated.

The quarterly growth performance would have been worse if not for a slight recovery in output from the services sector, which accounts for around 74% of the economy.

Services output grew by 0.4% in the second quarter of 2008 - compared to 0.3% in the first three months of the year - driven by progress from transport, communications and storage firms.

This offset output growth of just 0.1% from business services and finance firms - the slowest pace in more than six years - as areas such as financial intermediation and real estate activity weakened.

The ONS estimates also revealed a 0.4% decline in manufacturing output over the quarter. The squeeze on hard-pressed consumers was highlighted by weaker growth in retail output, which slowed to 0.2% during the second quarter of the year.