U.K. May Have Escaped a Recession Amid Struggling Recovery

The U.K. economy may have narrowly avoided returning to recession in the first three months, defying the warnings of some Bank of England policy makers.

Gross domestic product probably expanded 0.1 percent from the fourth quarter of 2011, when it shrank 0.3 percent, according to the median of 40 estimates in a Bloomberg News survey. A recession is defined as two straight quarters of contraction. The Office for National Statistics will publish the data at 9:30 a.m. in London today.

A recovery struggling to gain momentum may heap further pressure on Prime Minister David Cameron, who has faced mounting criticism of his leadership since the March 21 budget. With the government vowing to stick to its plan to erase the deficit and prospects in the euro region deteriorating, forecasters see the U.K. economy barely growing this year. Central bank policy maker David Miles said yesterday a first-quarter contraction would not be a “great surprise.”

“They’ll have to suck up the first six months of the year looking pretty bad from a headline point of view,” said David Tinsley, an economist at BNP Paribas in London and a former central bank official. “They’ve put all their chips on one outcome, which is that the austerity program will work and they’ll see some decent growth in later years.”

The economy probably expanded 0.3 percent in the first quarter from a year earlier, according to a Bloomberg survey of 31 economists.

The pound was trading at $1.6164 as of 8:41 a.m. in London, up 0.1 percent from yesterday. It was little changed at 81.77 pence per euro. Government bonds declined, with the 10-year gilt yield rising to 2.123 percent from 2.097 percent.

Onus on Services

Rising energy prices, government spending cuts and anemic wage growth are squeezing consumers, creating a drag on the recovery. Pay growth slowed to 1.1 percent in the three months through February, less than a third of the inflation rate.

Cheshunt, England-based Tesco Plc (TSCO), the largest U.K. retailer, said April 18 it will invest 1 billion pounds ($1.6 billion) to revive its domestic business after sales at stores open at least a year fell 1.6 percent in the final quarter.

Construction output returned to growth in February, though it failed to offset a 12.9 percent decline in January, leaving the onus on services, the largest part of the economy, to keep Britain out of recession. An extra public holiday in June to mark Queen Elizabeth II’s 60 years on the throne may depress economic output in the second quarter.

G-7 Economies

Britain was hit hard by the financial crisis and GDP is still well below its pre-recession peak in early 2008, with only Japan and Italy further behind among Group of Seven countries. Britain is the first G-7 country to report output for the first quarter.

The 17-nation euro region, the biggest market for British exports, may already be back in recession, surveys suggest. Treasury forecasters and the International Monetary Fund expect the U.K. economy to grow 0.8 percent this year.

“The debate around a technical recession deflects attention from the real issues facing the economy, which relate to a prolonged period of unduly low growth,” the British Chambers of Commerce said in a statement yesterday.

Cameron and Chancellor of the Exchequer George Osborne have rebuffed opposition calls to pull back from a budget-cutting program aimed at eliminating most of the deficit by 2017.

Their Conservative Party has lost public support over the budget, which voters say helped the rich at the expense of pensioners and charities, and the handling of a threatened strike by tanker-truck drivers. Labour led the Tories by 41 percent to 33 percent in an ICM Ltd. poll published yesterday.

Bank of England

The economy may get little further help from the Bank of England, whose officials have suggested inflation may retreat less quickly than they forecast two months ago even though the economy could contract in the first half. Only David Miles on the nine-member Monetary Policy Committee sought an expansion in emergency stimulus this month after Adam Posen switched sides.

Miles said yesterday in an interview with Bloomberg News voting for more bond purchases was “still the right strategy.” Following a stronger near-term price outlook, “inflation will go back to the target level and quite likely sit beneath it if you look beyond the next six to nine months.”

The U.S. Federal Reserve will release its policy statement at around 12:30 p.m. today in Washington, and its forecasts for interest rates, growth, inflation and unemployment at 2 p.m. Policy makers will probably repeat their plan to keep the benchmark interest rate low at least through late 2014, economists say.

A separate report today by Halifax showed Britons became more optimistic about the housing market last month. The mortgage-lender’s gauge on the outlook for house prices rose to 19 from 7 in January, the unit of Lloyds Banking Group Plc said in an e-mailed statement in London. The index is based on a survey of 2,029 adults from March 23 to March 29.

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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