U.K. Economy Shrinks More Than Estimated on Building Slump

May 24 (Bloomberg) -- The U.K. economy shrank more than initially estimated in the first quarter after construction was revised to show a deeper slump, which may bolster the case for the Bank of England to restart bond purchases. (Source: Bloomberg)

The U.K. economy shrank more than initially estimated in the first quarter after construction was revised to show a deeper slump, which may bolster the case for the Bank of England to restart bond purchases.

Gross domestic product fell 0.3 percent, compared with a 0.2 percent decline estimated last month, the Office for National Statistics said today in London. Construction output fell 4.8 percent, the most in three years and more than the 3 percent initially estimated, while services and production were unrevised. Net trade and inventories subtracted from GDP.

The Bank of England’s decision to stop expanding stimulus this month was “finely balanced,” it said yesterday, amid growing threats from the euro-area debt crisis. With the economy facing additional headwinds from the government’s spending cuts, the International Monetary Fund said this week that the U.K. needs more monetary easing and fiscal stimulus to stoke growth.

“If there’s a heightening of tensions in the euro crisis in the next few months, the bank would respond,” said Brian Hilliard, an economist at Societe Generale in London and a former central bank official. “I’m expecting another GDP fall in the second quarter and a return to growth in the third.”

The quarterly GDP decline compared with the 0.2 percent drop that was the median forecast of 29 economists in a Bloomberg News survey. From a year earlier, the economy shrank 0.1 percent, the first annual contraction since the fourth quarter of 2009.

Euro-Area Crisis

The pound remained lower against the dollar after the data were published and was down 0.3 percent at $1.5663 as of 9:38 a.m. in London. Gilts stayed higher, with the yield down 2 basis points from yesterday at 1.756 percent.

The U.K. slump compares with 0.5 percent growth recorded in Germany in the first quarter, where expansion was boosted by exports. Still, that nation’s Ifo business confidence index fell more than economists forecast in May and euro-area measures of services and manufacturing both dropped, reports today showed.

In Brussels last night, European leaders clashed over euro bonds at their 18th summit in more than two years of crisis fighting as speculation mounted that Greece might leave the euro area.

In the U.K., consumer-spending growth slowed to 0.1 percent in the three months through March from 0.4 percent in the previous quarter, the statistics office said. Government spending surged 1.6 percent, the most in four years.

Fixed capital formation fell 0.3 percent, exports rose 0.1 percent and imports increased 0.4 percent. Changes in inventories subtracted 0.7 percentage points from GDP, while net trade subtracted 0.1 percentage points.

Cameron Pressure

The deeper slump in the first quarter may add to pressure on Prime Minister David Cameron, who is being attacked by the opposition Labour Party over his commitment to the fiscal squeeze at a time when Britain is in a recession. GDP has risen 0.3 percent since the second quarter of 2010, when Cameron’s coalition government came to power, the statistics office said.

Recent data suggest the economy’s weakness has continued into the current quarter, with an index of manufacturing demand falling to the weakest level this year in May, according to the Confederation of British Industry. Retail sales dropped the most in more than two years in April as record rainfall reduced demand for clothing and fuel sales plunged.

BOE Decision

Eight of the Bank of England’s nine-member Monetary Policy Committee voted to hold the asset-purchase target at 325 billion pounds ($509 billion) on May 10 as the bank forecast inflation would slow this year less quickly than it had expected. David Miles maintained a push for a 25 billion-pound increase.

Still, officials said the decision was “finely balanced” for several MPC members, while Deputy Governor Charlie Bean said more stimulus may be needed if conditions “deteriorate significantly.”

“If the economy turns out to be significantly weaker than forecast fiscal easing should be considered,” IMF Managing Director Christine Lagarde said this week in London.

Output in services, the largest part of the economy, was up 0.1 percent in the first quarter, while production fell 0.4 percent, today’s report showed. A separate report today showed business investment rose 3.6 percent in the first quarter from the previous three months and was up 14.2 percent from a year earlier, the most in almost seven years. An index of services increased 0.5 percent in March from February.

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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