Britain's Economy Contracts More Than Estimated as BOE Divides on Remedies

Britain’s economy shrank more than initially estimated in the fourth quarter, complicating the task of the Bank of England as a split deepens among policy makers on whether to withdraw stimulus.

Gross domestic product fell 0.6 percent from the previous three months, compared with an initial estimate for a 0.5 percent drop, the Office for National Statistics said today in London. The statistics office said its “best estimate” for the impact of cold weather on the data remains 0.5 percent. The slump was led by construction and investment.

The coldest December in a century hampered the recovery, dragging the economy to its worst performance in more than a year. The Bank of England kept its key interest rate on hold this month as inflation at twice the 2 percent target led to a four-way split among officials. Recent surveys suggest the contraction may have been a temporary setback, with services resuming growth in January and manufacturing strengthening.

“There has been a significant slowdown in the economy, even outside of weather effects at end of last year,” said James Shugg, the Westpac Banking Corp. economist who was the only economist in the Bloomberg News survey to correctly predict the a downward revision. “I’m still pretty cautious about the U.K.” and “at the margin this adds to the case for a bit of caution on the rate side.”

Pound Drops

The pound fell as much as 0.4 percent to $1.6069 today. It remained lower against the dollar after data showed the U.S. economy grew slower than previously calculated in the fourth quarter. It traded at $1.6090 as of 1:53 p.m. The yield on the 10-year government bond was up 1 basis point at 3.63 percent.

Figures from the Commerce Department in Washington showed that the world’s largest economy grew at a 2.8 percent annual rate in the fourth quarter, compared with a 3.2 percent estimate issued last month. The euro-area economy expanded 0.3 percent in the period, a report earlier this month showed, less than the 0.4 percent pace forecast by economists.

In the U.K., consumer-spending growth fell 0.1 percent in the fourth quarter from the previous three months, its first decline since the second quarter of 2009. Government spending rose 0.7 percent on the quarter, the statistics office said.

Investment dropped 2.5 percent, while construction output also fell by that amount. Exports rose 2.3 percent and imports increased 3 percent.

‘Disappointing’

Chancellor of the Exchequer George Osborne said the U.K. data were “disappointing and today’s revision doesn’t change that fact,” the U.K. Treasury said in an e-mailed statement. “It also doesn’t change the need to deal with the nation’s credit card -- the country is borrowing more this year than is spent on the entire National Health Service.”

The statistics office said the downward revision to quarterly GDP was due to data on industrial production, services and retail sales. The annual GDP deflator was 2.8 percent. From a year earlier, the economy grew 1.5 percent.

Dechra Pharmaceuticals Plc, a U.K. veterinary drugs and services company, said on Feb. 22 that first-half profit fell after taking a charge for two acquisitions and adverse weather in the U.K.

BOE Divisions

A separate report showed business investment fell 2.5 percent in the fourth quarter from the previous quarter and was up 10 percent on the year. An services index dropped 1.3 percent in December from November and fell 0.6 percent on the year.

Bank of England Governor Mervyn King said this month that the U.K. recovery is “unlikely to be smooth.” While the bank held its key rate on Feb. 10, three policy makers --Spencer Dale, Andrew Sentance and Martin Weale -- voted to increase it to tame inflation. Sentance wanted a 50 basis-point move.

Adam Posen kept up his call for an expansion of the bank’s 200 billion-pound bond-purchase program, while the remainder of the nine-member panel voted to maintain the current policy.

Inflation accelerated to 4 percent in January, and the central bank forecasts the rate will rise to about 4.5 percent in the coming months before easing to its goal in 2012.

Strengthening inflation, and government tax increases to narrow the budget deficit are squeezing household income, clouding the outlook for consumer spending this year. Consumer confidence stayed close to the lowest in almost two years this month, GfK said in a report today.

Ed Balls, Treasury spokesman for the opposition Labour Party, said Britons “now face the worst of all worlds -- unemployment and inflation both rising, growth stalled and consumer confidence collapsed.”

“We do expect some sort of bounceback,” said Hetal Mehta, an economist at Daiwa Capital Markets Europe and a former U.K. Treasury official. Still, today’s GDP data show “underlying weakness is quite clear and present” and “this does if anything make that dilemma more pronounced for the Bank of England.”

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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