U.K. Slump May Be Smaller as Construction Drop Revised: Economy

Britain’s economy may have shrunk less than previously estimated in the second quarter after the statistics office reported a smaller slump in construction.

Building output fell 3.9 percent in the three months through June, the Office for National Statistics said in London today. That compares with a 5.2 percent drop in the first estimate of gross domestic product on July 25, which showed the economy shrank 0.7 percent. The revision on its own would mean a 0.1 percentage point upward revision to GDP, the statistics office said.

The Bank of England cut its U.K. forecasts this week and Governor Mervyn King said growth in the near term will be “subdued.” The central bank, which left its bond-purchase target unchanged at 375 billion pounds ($585 billion) this month, left the door open to more stimulus if needed, with King saying policy makers will do all they can to spur a recovery.

“These revisions do little to change the overall size of the renewed recession,” saidSamuel Tombs, an economist at Capital Economics Ltd. in London. “What’s more, the smaller than expected drop in GDP in the second quarter is likely to mean that the bounce-back in the third quarter will be weaker than otherwise.”

The central bank said in a report this week that “erratic factors” exaggerated the weakness in second-quarter GDP.

“Much of the contraction in the first half of this year reflects unusually large declines in measured construction output,” it said. “Falls of that magnitude appear out of line with industry surveys and seem unlikely to persist.”

Industrial Output

Today’s construction report follows industrial production data earlier this week that the ONS said would lead to a 0.07 percentage point upward revision to GDP. Statisticians said the combined effect of the new figures means GDP for the three months through June may be about 0.2 percentage point higher than initially estimated.

Building output accounts for about 7 percent of the U.K. economy. Updated data on services, which account for about three quarters of GDP, will be published on Aug. 24.

In a separate report, the ONS said factory-gate prices were unchanged in July from June and were up 1.7 percent from a year earlier. The annual rate of inflation is the lowest since October 2009. Core output prices, which exclude the costs of food, alcohol, tobacco and petroleum, were also unchanged on the month and increased 1.3 percent from July 2011.

Input prices jumped 1.3 percent in July from June, the first monthly increase since March, and dropped 2.4 percent in the year.

Price Pressure

A decline in the price of some commodities has eased pressure on factories’ margins and helped contain inflation. Crude oil has fallen about 16 percent from the year’s high closing price reached in late February. Consumer-price growth was 2.4 percent in June and the Bank of England sees it falling below its 2 percent target next year, indicating a need for more stimulus in the economy.

“Moderation in input price pressures as commodity costs fell bought some breathing space for producers and helped bring output prices down,” said Victoria Clarke, an economist at Investec Securities in London. “The central bank will add to stimulus because they’ve taken the view that they need insurance against everything that’s going on in the euro area.”

Price pressures also eased in the euro region, with German inflation unexpectedly slowing in July as the sovereign debt crisis curbed growth. The inflation rate, calculated using a harmonized European Union method, eased to 1.9 percent from 2 percent in June, the Federal Statistics Office in Wiesbaden said today. That’s the first drop below the European Central Bank’s 2 percent limit since December 2010.

Drought Damage

Still, there may be upward pressure on food prices as droughts damage crops from the U.S. to Russia. An index of 55 food items tracked by the United Nations’ Food & Agriculture Organization jumped 6.2 percent to 213.15 points in July from 200.8 points in June, the Rome-based agency reported. That marked the biggest increase since November 2009.

The global economy remains under pressure. In China, export growth collapsed and imports rose less than estimated in July, adding to signs the global economy is weakening and raising the odds the government will step up measures to support expansion. Singapore said its economy shrank an annualized 0.7 percent last quarter, less than the preliminary reading of a 1.1 percent contraction.

Russia’s central bank refrained from raising borrowing costs for an eighth month, highlighting “significant” inflation risks from a weaker harvest and higher interbank rates that constrain lending growth. Bank Rossii’s main refinancing rate was left at 8 percent, a quarter-point above the record low, the Moscow-based central bank said in a statement on its website today.

-- With assistance from Svenja O’Donnell, Mark Evans and Harumi Ichikura in London. Editors: Patrick Henry, Fergal O’Brien

To contact the reporters on this story: Jennifer Ryan in London at jryan13@bloomberg.net; Scott Hamilton in London at shamilton8@bloomberg.net

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

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