U.K. Economic Growth Probably Slowed to 0.5% in Fourth Quarter

Britain’s economic growth probably slowed in the fourth quarter as the recovery’s momentum ebbed before Prime Minister David Cameron’s government steps up its budget squeeze.

Gross domestic product rose 0.5 percent after a 0.7 percent increase in the third quarter, according to the median forecast of 33 economists in a Bloomberg News survey. Another report may show the budget deficit widened in December, according to a separate survey. The Office for National Statistics will publish the figures at 9:30 a.m. in London today.

Bank of England policy makers led by Governor Mervyn King have split three ways on whether to focus on taming inflation or boosting a recovery threatened by the fiscal squeeze. Andrew Sentance, who has voted to increase the benchmark interest rate since June, said that the “time has come to act.” King, who chairs the nine-member policy panel, is due to deliver his first public speech of the year later today.

“The bank is facing a really difficult situation,” said Alan Clarke, an economist at BNP Paribas in London. “It would be a double-whammy to hike rates during the most severe fiscal tightening in a generation. That would kill off the recovery.”

The pound fell 0.4 percent against the dollar before the report, and was trading at $1.5927 as of 8:35 a.m. in London.

The central bank left its benchmark interest rate on hold at a record low of 0.5 percent this month and kept its asset purchase program at 200 billion pounds ($320 billion). It will publish the minutes of that meeting tomorrow.

Forecast Range

The forecasts for GDP, which is a first estimate for the fourth quarter, ranged from 0.2 percent by Fathom Financial Consulting to 0.7 percent at Daniel Stewart & Co.

Recent data suggests the recovery is faltering, with surveys showing construction and services shrank last month. Retail sales fell 0.8 percent in December, a record for that month, as the coldest weather in a century and higher prices undermined holiday shopping.

“There is a reasonable consensus that this is a pretty bad quarter” mainly because of the climate, U.K. Business Secretary Vince Cable said in an interview on BBC Radio 4’s “Today” program today. “It was very bad and it’s clearly had a significant effect on construction and on other dependent industries.”

Inflation Bets

While economic growth is showing signs of easing, higher oil prices and a tax increase combined to push inflation to an eight-month high of 3.7 percent in December. That’s prompted investors to add to bets the bank will increase its benchmark rate this year. The implied yield on 90-day short-sterling futures expiring in December climbed 29 basis points this month to 1.54 percent.

“If we do not start to raise U.K. interest rates gradually soon, we risk having to do so more aggressively in the future -- which could create a big shock to business and consumer confidence further down the track,” Sentance said in London yesterday. “The lack of a substantive policy response” to price gains “enhances the risk of a loss of credibility.”

Nevertheless, policy maker Adam Posen said Jan. 21 he is retaining his view that underlying inflation remains “low,” indicating he continues to favor more stimulus. He voted to increase bond purchases in October, November and December.

Inflation ‘Flak’

“The bank is going to have to cop a lot of flak for high inflation, but I think we have to ride to its defense here and say it is beyond their control,” said Peter Dixon, an economist at Commerzbank AG in London. “It’s not clear to me that moving interest rates would do anything from preventing those problems from remaining in place,” Dixon said.

“There are various options open to the governor of the Bank of England and the Monetary Policy Committee to support growth,” Cable told the BBC today. “They are an independent body and they’ve got to take their own reading of the risks of inflation and deflation. Clearly they’re acting in parallel and in support of the overall direction of recovery.”

Growth may be restrained in 2011 as the government steps up cuts to reduce the deficit. Data today will show the shortfall widened to 18 billion pounds in December from 16.1 billion pounds a year earlier, according to the median estimate of 11 economists in a Bloomberg survey.

With three months of the fiscal year remaining, the government may struggle to keep the deficit to the 148.5 billion pounds forecast by the Treasury’s fiscal watchdog in November. The shortfall in the first nine months of the year was probably 124 billion pounds, according to the Bloomberg survey.

“The economy has lost a bit of momentum relative to what we’ve been seeing in previous quarters, but that’s to be expected at this point in the cycle,” said Dixon, who forecasts 2011 growth of between 1.8 percent and 2.25 percent. That “isn’t great, but given the magnitude of the fiscal squeeze, it wouldn’t be a bad number if it turns out.”

To contact the reporter on this story: Svenja O’Donnell in London at sodonnell@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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