U.K. Growth Fueled by Jump in Government Spending

The U.K. economy’s fastest quarter of growth in nine years was fuelled by rebounding consumer spending and inventories and the biggest jump in government spending since 2008.

Gross domestic product expanded 1.2 percent in the three months through June from the first quarter, unrevised from a previous measurement, the Office for National Statistics said today in London. The result matched the median forecast of 27 economists in a Bloomberg News survey.

The International Monetary Fund yesterday cut its 2011 economic growth forecast for the U.K. and said the Bank of England should be ready to add more stimulus if the recovery falters. Britain faces the prospect of the biggest spending cuts since World War II to tackle its record budget deficit.

“The more the contribution of government now, the more we’re going to miss it when it’s taken away,” Peter Dixon, an economist at Commerzbank AG in London, said in a telephone interview. “We’re going to see much slower growth.”

The pound rose as much as 0.2 percent against the dollar after the report, and traded at $1.5866 as of 11:30 a.m. in London. The yield on the benchmark two-year government bond was up 1 basis point today at 0.647 percent.

In the third estimate of GDP for the second quarter, the statistics office revised up its measure of government-spending growth to 1 percent from 0.3 percent because of late data, mostly from central government. That was the biggest increase in six quarters.

Investment, Spending

Fixed investment climbed 1.4 percent, up from a 2.4 percent drop previously measured, the statistics office said. Consumer- spending growth was unchanged at 0.7 percent. Inventories increased by 88 million pounds ($140 million), the first gain in seven quarters. Business investment rose 0.7 percent in the quarter, officials said in a separate report.

Consumer spending contributed 0.4 percentage point to growth, government spending added 0.2 percentage point, while fixed investment and inventories together added 0.6 percentage point, the statistics office said.

A U.K. retail sales index rose to the highest level in more than six years in September, the Confederation of British Industry said in a separate report today. Retailers saying volumes rose from a year earlier outnumbers those reporting declines by 49 percentage points.

Construction Jump

Statistics officials revised up construction growth to 9.5 percent, the most since 1963, from the 8.5 percent prior result. While industrial production and manufacturing were unchanged, services expansion was revised down by 0.1 percentage point to 0.6 percent, the statistics office said.

The IMF yesterday forecast U.K. growth of 2 percent in 2011, compared with a prediction in July of 2.1 percent.

“If the recovery were to weaken and increase disinflationary pressure, asset purchases should resume,” the fund said in a report. “Conversely, the central bank must stand ready to start a gradual tightening if output recovers apace and inflation continues to surprise on the upside.”

Recent data suggest the slowdown has already started. U.K. house prices dropped the most in 18 months in September, and the number of claims for unemployment benefits rose in August for the first time in seven months.

Royal Bank of Scotland Group Plc, the nation’s biggest government-controlled bank, said this month it will eliminate 3,500 U.K. jobs to reduce costs. The Edinburgh-based lender swung into profit in the first six months of the year for the first time since 2007.

Budget Cuts

The Conservative-led coalition government is preparing expenditure cuts and tax increases totaling 113 billion pounds to reduce a deficit that’s reached 11 percent of economic output. Chancellor of the Exchequer George Osborne will set budgets for each department on Oct. 20.

“It’s clear if we were to divert from that credible plan - - as some people have suggested we should -- that would push the economy back into instability,” Osborne told Bloomberg Television yesterday.

Bank of England policy makers signaled they’re moving closer to adding more stimulus to the economy after they held their bond-purchase plan at 200 billion pounds and left the benchmark interest rate at a record low of 0.5 percent, according to minutes of the Sept. 9 meeting published last week.

The household savings ratio, a measure of post-tax income hoarded by consumers, fell to 3.2 percent, the lowest since the third quarter of 2008, the statistics office said.

The current account deficit narrowed to 7.4 billion pounds in the second quarter as income surged, a separate report showed. That was down from a revised 11.3 billion pounds in the first three months of the year, which was the largest gap since the third quarter of 2007.

To contact the reporter on this story: Jennifer Ryan in London at jryan13@bloomberg.net

To contact the editor responsible for this story: John Fraher at jfraher@bloomberg.net

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