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Housing slump affecting UK economic growth

The housebuilding slump hit economic growth in the second quarter of the year as the UK's slowdown gathered pace, according to official estimates today.

The economy expanded by just 0.2 per cent 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 per cent due to a "particularly large" fall in new housebuilding, according to the Office for National Statistics' first estimates.

A raft of house builders 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 per cent - 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 per cent of the economy.

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