U.K. Economy Expanded 0.5% in First Quarter as Export Growth Accelerated
U.K. exports helped the economy resume growth in the first quarter and outweighed the biggest slump in company investment and consumer spending in almost two years.
Exports rose 3.7 percent in the quarter and net trade added a record 1.7 percentage points to gross-domestic-product growth, the Office for National Statistics said today in London. Consumer spending dropped 0.6 percent and company investment plunged 4.4 percent. GDP rose 0.5 percent on the quarter and 1.8 percent from a year earlier, matching initial estimates.
The Bank of England and the government are counting on the pound’s weakness to help rebalance the economy toward manufacturing and exports. The drop in sterling since 2007 is fuelling a surge in inflation, dividing policy makers on whether to keep the benchmark interest rate at a record low of 0.5 percent to nurture the recovery.
“The positive contribution from net trade has been a long time coming, but the fall in investment is a blow to hopes that this would be the other pillar of growth,” said Hetal Mehta, an economist at Daiwa Capital Markets in London. “These figures reinforce our view that the majority of the Monetary Policy Committee will continue to vote for no change in interest rates this year.”
The pound was little changed against the dollar and traded at $1.6193 as of 10:36 a.m. in London. Investors are betting on a quarter-point rate increase in February, according to forward contracts on the sterling overnight interbank average, or Sonia, compiled by Tullett Prebon Plc.
From a year earlier, consumer spending dropped 0.3 percent in the first quarter, the statistics office said. Imports fell 2.3 percent on the quarter and were up 4.9 percent on the year. Government spending rose 1 percent on the quarter and 1.1 percent from a year earlier.
Company investment fell 4.4 percent on the quarter and was down 2.7 percent from a year earlier. The GDP deflator -- the broadest measure of inflation in the economy -- was 1.8 percent, the most since 1996.
The statistics office revised the first-quarter drop in construction to 4 percent from 4.7 percent. Production rose 0.2 percent, less than the 0.4 percent initially estimated on April 27. Manufacturing increased 1.1 percent, and services expanded by 0.9 percent.
Bank of England Governor Mervyn King on May 11 the U.K. faces a “difficult time ahead” and that the rebalancing of the economy will take “not just one year, but several years.”
“Some pickup in underlying growth is likely during 2011 -- albeit less than judged probable in February -- driven by a continuing recovery in business investment and a positive contribution from net exports,” the central bank said.
U.K. export growth has been helped by rising global demand and the pound’s decline of about 24 percent on a trade-weighted basis since the start of 2007. The Organization for Economic Cooperation and Development today maintained its forecast for the world economy to expand 4.2 percent this year.
At the same time, U.K. households remain under pressure from a surge in inflation and the biggest fiscal squeeze since World War II. London-based Marks & Spencer Group Plc (MKS), the U.K.’s biggest clothing retailer, said yesterday that the short-term outlook for the economy “remains challenging.” A squeeze on consumers’ disposable income and rising commodity prices make the retailer “cautious.”
The OECD cut its forecast for U.K. growth and said the Bank of England should maintain stimulus to support the recovery. GDP will rise 1.4 percent instead of the 1.5 percent predicted in March, it said today. The economy will grow 1.8 percent in 2012, down from a previous projection of 2 percent.
“Monetary policy should remain expansionary over the forecast period to support activity in view of the tightening fiscal stance,” the OECD said. “However, normalization of interest rates will need to start during 2011 to stave off significant increases in inflation expectations.”
Six of the bank’s nine-member MPC, including King, voted to hold the key interest rate at a record low of 0.5 percent this month, citing concerns that an increase could “adversely affect consumer confidence.” A Nationwide Building Society index of household sentiment fell in April as the government vowed to stick to plans to eliminate the bulk of the record deficit by April 2015. More than 300,000 public jobs will be axed as part of the plan.
Three MPC members voted to raise the key rate to control inflation that surged to 4.5 percent in April. The bank’s latest quarterly forecasts show price gains may reach 5 percent as commodity prices surge.
Martin Weale, who voted for a quarter-point increase, said May 23 that while some prices pressures are temporary, “there are also worries that after a sustained period of high inflation, it may be more entrenched people’s expectations.”
His colleague Paul Fisher said the economy is most likely in a “temporary soft patch” that may worsen from a “prolonged weakness in demand, and in particular, consumer spending.”
“At the very least, that makes me pause to consider when policy should start to be normalized or even whether further loosening might be justified,” he said.
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