June 30 (Bloomberg) -- U.K. economic growth was revised down to 0.4 percent in the first quarter as households curbed spending and manufacturing shrank, making it more likely the Bank of England will cut interest rates this year.

Gross domestic product was revised down from 0.5 percent in the previous estimate, which was less than the revised 0.6 percent in the three months though December, according to the final estimate from the Office for National Statistics in London today. It also revised annual growth higher from 2002 to 2004.

``We are going to see growth tapering off during the remaining quarters of this year,'' said Richard McGuire, economist at Royal Bank of Canada in London. ``Our forecast is for a 25 basis-point cut in November. However, the risk clearly lies in favor of an earlier cut, with the ongoing retrenchment of the consumer.''

Growth in the U.K., Europe's second-largest economy, has lost momentum as consumer spending slows and manufacturing contracts amid higher oil costs. Britain's biggest business lobby said yesterday an index of retail sales dropped the most in at least 22 years in June. Dixons Plc, the country's largest electronics retailer, said June 22 it will shed jobs to reduce costs.

Household spending was revised down to 0.1 percent from 0.3 percent, and was the slowest since the fourth quarter of 2000, the statistics office said.

``Policy makers put quite a lot of weight on the revisions,'' said Alan Castle, an economist at Lehman Brothers Holdings Inc. in London, who expects rates to be cut in the fourth quarter. ``In particular they will be concentrating on the consumer spending sector. Concerns would be heightened if there was any sign the slowdown was spreading.''

Manufacturing Contracts

Manufacturing, which accounts for 16 percent of the economy, shrank 0.9 percent, revised down from a decline of 0.7 percent in the previous growth estimate, the statistics office said.

Oil futures in New York and London have traded above $50 a barrel most of the time since February, reaching a record $60.95 on June 27.

Almost all the growth in the quarter came from government spending and services output. Government spending increased an unrevised 0.7 percent and services output, which accounts for almost three quarters of the economy, was revised down to 0.7 percent.

The U.K.'s $2.1 trillion economy has expanded for 51 consecutive quarters, and has outpaced the 12 nations sharing the euro every year since 1992. Growth in euro area was 0.5 percent in the first quarter. The European Central Bank predicts the euro area will expand only about 1.4 percent this year, while the Bank of England expects the U.K. to grow 2.6 percent.

Interest Rates

Five increases in the Bank of England's benchmark repurchase rate between November 2003 and August 2004 to 4.75 percent have already left borrowing costs at the highest in the Group of Seven industrial nations.

Investors have reversed expectations of higher rates and now expect a rate cut since the bank lowered its estimate for growth this year from 2.7 percent on May 11. Two members of the bank's rate-setting committee, one of them Chief Economist Charles Bean, voted to reduce rates on June 9 to prevent the consumer slowdown from deepening, minutes of its meeting showed.

The rate on the interest-rate future maturing in December was 4.36 percent before the report, down from a close of 4.76 percent on May 10. It is below the three-month Libor money market rate of 4.80 percent.

Growth for the whole of last year was 3.2 percent, up from the previous estimate of 3.1 percent, on higher household spending, the statistics office said. In 2003 the economy grew a revised 2.5 percent, instead of the 2.2 previously estimated and in 2002 it expanded a revised 2 percent, instead of 1.8 percent.

The U.K.'s current-account deficit in the first quarter widened to 5.8 billion pounds, from a revised 4.1 billion pounds in the fourth quarter. The median forecast in a Bloomberg survey was for a 6.8 billion-pound gap.

To contact the reporter on this story: Laura Humble in London lhumble1@bloomberg.net.

Last Updated: June 30, 2005 04:30 EDT