U.K. Export Growth Helps Economy Extend Rebound as Consumer Spending Slows

U.K. export growth helped the economy extend its recovery in the third quarter as growth in consumer, government and investment spending slowed by more than half.

Gross domestic product rose 0.8 percent from the previous three months, when it increased 1.2 percent, the Office for National Statistics said today in London. That matched an initial estimate on Aug. 26 and the median forecast of 30 economists in a Bloomberg News survey. Exports rose 2.2 percent after a 2.3 percent increase in the previous three months.

Momentum in the economy may wane as the government implements the biggest budget squeeze since World War II and strains in Ireland, the U.K.’s fifth-biggest export market, and the euro area deepen. The outlook has divided Bank of England policy makers as they debate whether to expand bond purchases or raise the key interest rate to tame inflation.

“The economy has to get past the fiscal tightening next year and there’s a high degree of uncertainty on how 2011 will unfold,” said Philip Shaw, chief economist at Investec Securities in London. “The news on exports is encouraging, but we’ve had false dawns before.”

Net Trade Boost

Consumer-spending growth slowed to 0.3 percent in the third quarter from 0.7 percent in the previous three months, the statistics office said. Government spending rose 0.4 percent, down from 1 percent, and investment growth eased to 0.6 percent from 1.4 percent. Imports rose 0.7 percent and net trade contributed 0.4 percentage points to GDP. Inventories added 0.1 percentage points.

Photographer: Chris Ratcliffe/Bloomberg

A container is loaded on to a container ship at the Port of Felixstowe, U.K. Close

A container is loaded on to a container ship at the Port of Felixstowe, U.K.

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Photographer: Chris Ratcliffe/Bloomberg

A container is loaded on to a container ship at the Port of Felixstowe, U.K.

The pound was little changed against the dollar after the data were published, and was at $1.5781 as of 9:51 a.m. in London.

A separate report showed business investment fell 0.2 percent in the third quarter from the previous three months. It was up 4.6 percent from a year earlier. An index of services in September rose 0.6 percent from the previous month.

The euro-area economy is also cooling. GDP growth slowed to 0.4 percent in the third quarter from 1 percent in the previous three months. In the U.S., where the Federal Reserve pledged this month to buy $600 billion in Treasury securities, growth was an annual 2.5 percent in the third quarter, data yesterday showed. While that was above an initial estimate, it has not been enough to bring down an unemployment rate hovering near 10 percent.

Economic ‘Ingredients’

As the euro-area’s debt crisis mounted over the past month, Bank of England Governor Mervyn King noted the risk to the U.K. from the region, saying on Nov. 16 that growth in the currency area is “a very important ingredient” to U.K. prospects.

A day after Ireland sought aid from the European Union on Nov. 21, Chancellor of the Exchequer George Osborne pledged billions of pounds to help the country shore up its finances. Osborne said trade and banking links mean it’s in Britain’s interest to provide support.

The U.K.’s “underlying growth seems to be pretty strong,” Philip Rush, an economist at Nomura International Plc in London, said before the data. Still “there are clear headwinds in the first half of 2011. Ireland is a concern, particularly around how it may drag down net trade.”

Asian Demand

Growth in Asia and other emerging markets is helping to drive export demand. Bath, England-based Rotork Plc, a maker of industrial valve controls, said on Nov. 19 that orders rose 28 percent in the third quarter from a year earlier. The company said it expects weakness in Europe and more activity in Asia in water and power markets.

Still, consumer spending may remain under pressure. Mitchells & Butlers Plc, the U.K. owner of the All Bar One chain, said yesterday that the outlook for consumer spending “remains uncertain’” due to the fiscal squeeze and a planned sales-tax increase.

The Organization for Economic Cooperation and Development said on Nov. 18 that U.K. growth will “remain subdued” next year as the spending cuts bite. The government’s plans to reduce the deficit to 2 percent of economic output by 2015 from more than 10 percent today involve 490,000 public-sector job losses and sweeping welfare cuts.

Nevertheless, the economy will gain momentum in 2012 as the global recovery drives exports and higher business confidence spurs corporate investment, the OECD said. The Paris-based group said the central bank should start rising the key rate from a record low of 0.5 percent in the second half of 2011.

Bank Split

Bank of England policy makers split three ways on the need for further stimulus in the economy for a second month at their November meeting. Adam Posen maintained a call to increase the 200 billion-pound ($316 billion) bond-purchase plan by 50 billion pounds, while Andrew Sentance continued a push to raise the key rate from 0.5 percent as inflation held above the government’s 3 percent upper limit.

“While the economy is performing reasonably well, the majority of the committee will be happy to keep policy on hold,” Investec’s Shaw said.

Sentance and Posen, along with King, will answer questions from U.K. lawmakers in London tomorrow on the bank’s quarterly economic forecasts.

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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