Thinktank believes that economy grew by 0.6% in the three months between May and July after strong sterling hits factory output

Britain is growing at its slowest pace in a year, one of the country's leading think tanks said following news that the manufacturing sector is performing less strongly than the City expected. The National Institute for Economic and Social Research (NIESR) said it believed the economy expanded by 0.6% in the three months to July, down from 0.8% in the three months to June.

NIESR produced its estimate after the Office for National Statistics released figures showing manufacturing lagging well behind the service sector in its ability to recoup ground lost during the "great recession" of 2008-09. The ONS said that output from UK factories remained more than 7% below its pre-recession peak.

Although the economy as a whole has made up the lost ground, UK factories are producing 7.4% less than they were at the time of the pre-recession peak in early 2008.

City analysts blamed the 10% rise in the value of the pound – which makes exports dearer – and rising tension between Russia and Ukraine for industry's failure to bounce back from a drop in output of more than 1% in May.

James Knightley, economist at ING bank, said there was a disparity between the official figures and survey evidence which suggested a much stronger performance by manufacturing.

"In general it is pretty disappointing stuff and highlights the lack of rebalancing away from services to more production-led growth. Nonetheless, given the near-universal strength seen in the manufacturing surveys the true picture remains unclear."

The ONS said that manufacturing output in the second quarter of 2014 – considered a better guide to the trend than one month's figures – was 0.2% up on the first quarter but 7.4% below its position in the first quarter of 2008, after which the economy started to contract.

Industrial production, which includes mining, water supply and electricity and gas output, was also up by 0.3% between May and June and also up by 0.3% on the quarter. With North Sea oil and gas output in long-term decline, industrial production is 11.4% below its pre-recession level.

The ONS had pencilled in a quarterly rise of 0.4% in industrial production for its first stab at calculating growth in the second quarter of 2014, but said the slightly smaller increase would not result in a change to its 0.8% estimate.

Tom Lawton, head of manufacturing at accountants and business advisors BDO said: "Whilst we expect that manufacturing will continue a broadly positive trend for the rest of the year, the ONS figures clearly illustrate the significant economic and global headwinds that the sector faces. There continue to be concerns that the UK recovery is unbalanced, Europe remains significantly affected by the financial crisis, banks are not back to full strength and the expected boost in exports to the emerging economies has not gathered pace."

NIESR said that its latest estimate implied an annual growth rate of 3%, with the economy operating well below its potential level of output.

"We expect the MPC to introduce the first interest rate hike in February 2015."

Photograph: Adrian Sherratt for the Guardian