Economy slows but rate cuts unlikely soon

By Matt Falloon and Sumeet Desai

LONDON (Reuters) - The 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 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.

"The credit crunch, coupled with falling house prices, and rising food and energy costs are continuing to constrain activity, yet fiscal and monetary policy can do nothing to ease the pain," said James Knightley, an economist at ING.

The Office for National Statistics said GDP rose by 0.2 percent in the three months to June, bringing the annual rate down to 1.6 percent from 2.3 percent in the first quarter.

The slowdown was driven by the biggest drop in construction since mid-2005 and the result of sharp declines in house building as a decade-long housing boom swiftly reverses into a slump.

Construction would have been even weaker without a boost from government spending on infrastructure projects.

House builders have cut more than 4,000 jobs in recent weeks and are likely to remain under pressure as record low home loan approvals point to further sharp falls in house prices.