U.K. Economy Grew 0.5% in First Quarter as Services Surged Most Since 2006

Britain’s economy rebounded in the first quarter by enough to erase the contraction of the previous three months on the strongest surge in service-industry growth for four years.

Gross domestic product rose 0.5 percent from the final quarter of 2010, when it fell by the same amount, the Office for National Statistics said today in London. The result matched the median forecast of 28 economists in a Bloomberg News survey. Services expanded by 0.9 percent, the most since 2006.

The economy’s production level has returned to where it was before the fourth quarter, when the coldest December in a century disrupted business across the country. Bank of England officials are split on whether growth is strong enough to withstand the biggest fiscal squeeze since World War II, allowing them to remove stimulus to fight inflation.

“There’s not very strong growth momentum here,” Jens Larsen, chief European economist at RBC Capital Markets in London, said in an interview on “The Pulse” with Maryam Nemazee on Bloomberg Television. The bank “is going to wait until at least November before it starts hiking rates.”

The pound rose as much as 0.8 percent against the dollar after the report and traded at $1.6560 as of 12:36 p.m. in London. The yield on the benchmark two-year gilt was up 6 basis points today at 1.15 percent.

‘Reinforces Our Determination’

“The good news is the economy is growing,” Chancellor of the Exchequer George Osborne told BBC Television today. “Of course, around the world we are facing some choppy economic conditions. I think that reinforces our determination to stick to the course.”

Britain is the first member of the Group of Seven nations to report official growth data for the first quarter. Services, which make up 76 percent of the economy, expanded after a 1 percent increase in business services and finance, the statistics office said.

Barclays Plc (BARC), the U.K.’s third-largest bank by assets, made a good start this year “in a challenging external environment,” Chief Executive Officer Robert Diamond said in a statement today. Earnings at its investment banking unit declined by 33 percent after revenue fell.

Manufacturing Rebound

U.K. manufacturing increased by 1.1 percent in the first quarter, driving a 0.4 percent gain in industrial production. Construction shrank 4.7 percent, the most in two years, the statistics office said.

“The 0.5 is an arithmetic effect,” Joe Grice, chief economist at the ONS, told reporters at a briefing in London. “Simply the fact that snow and adverse weather conditions reduced GDP abnormally in the fourth quarter by 0.5 percent, there will have been an arithmetic 0.5 percent increase which will just take you back to the same level.”

While the pound’s drop of about 23 percent on a trade- weighted basis since the start of 2007 has boosted manufacturers by making British goods cheaper to buy abroad, they face pressure to raise prices because of higher commodity prices. The Confederation of British Industry said yesterday its measure of expected average selling prices for factories rose to 36 in April from 33 to reach the highest since January 1990.

MPC Split

Inflation was 4 percent in March, double the bank’s 2 percent target, and prospects for consumer prices have split the central bank’s Monetary Policy Committee. Andrew Sentance, who has been voting for an interest-rate increase since June, said yesterday in Manchester that annual price gains are likely to accelerate.

Minutes of the April decision showed Sentance maintained a push for a half-point increase, while Spencer Dale and Martin Weale kept up a call for a quarter-point move. The remaining six officials preferred to maintain the record low of 0.5 percent.

Price gains are also squeezing Britons’ spending power as Osborne vows to stick to a plan to eliminate the bulk of the U.K.’s record deficit by April 2015. The spending bill fell by 6 billion pounds ($10 billion) in the year to March and will cut 310,000 jobs in the public sector.

“These figures show an economy that has flatlined since the autumn,” Ed Balls, who speaks for the opposition Labour Party on finance, said in an e-mailed statement. “By making a political choice to cut further and faster than any other major economy this Conservative-led government has choked off the recovery.”

To contact the reporter on this story: Jennifer Ryan in London at Jryan13@bloomberg.net

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

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