U.K. Economy Shrinks Less Than Estimated, Incomes Rise

The U.K. economy shrank less than previously estimated in the second quarter and disposable incomes rose the most since 2009, boding well for the prospects of a recovery.

Gross domestic product fell 0.4 percent instead of the 0.5 percent drop estimated last month, thanks to upward revisions to construction and industrial production, the Office for National Statistics said today in London. Real household disposable income rose 1.9 percent, the biggest jump for three years.

The figures, released a week before the Bank of England holds its monthly policy-setting meeting, will fuel the debate among officials on whether further stimulus is needed as the economy emerges from its first double-dip recession since the 1970s. Its markets director, Paul Fisher, said in comments published today that third-quarter GDP will be “very strong.”

“I think it’s becoming less compelling for the BOE to do more quantitative easing,” said Alan Clarke, an economist at Scotiabank Europe Plc in London. “Real incomes have become a lot less negative than they were because inflation has dived and employment has been stonkingly good.”

The pound was up 0.2 percent on the day against the dollar and traded at $1.6195 at 4:12 p.m. in London.

The decline in GDP was less than the median forecast of 28 economists in a Bloomberg survey for a 0.5 percent drop. The figures also showed consumer spending fell 0.2 percent in the second quarter, revised from a previously estimated 0.4 percent drop. Business investment rose 0.9 percent. It had previously been estimated to fall 1.5 percent.

Incomes Boost

Personal incomes were boosted by higher net social benefits and property income, the statistics office said. The bill for wages and salaries climbed 2.1 percent, reflecting the strength of the labor market in the face of the recession. The savings ratio rose to 6.7 percent from 6 percent.

The current-account deficit widened to a record 20.8 billion pounds ($33.6 billion) in the second quarter from 15.4 billion pounds in the previous three months as foreign investors earned more on their U.K. debt and equity securities while income from overseas investments posted a small decline.

The gap was equal to 5.4 percent of GDP. Net trade exerted the biggest drag on the economy between April and June, underlining the challenges facing the recovery as the euro- region debt crisis hits demand in the biggest market for British exports.

Political Pressure

The economic slump has heaped pressure on Prime Minister David Cameron and left his Conservative Party trailing behind the Labour opposition in opinion polls. After three straight quarters of contraction, GDP is no higher than when his coalition came to power 2 1/2 years ago.

Unlike the U.S. and Germany, Britain has yet to return to the levels of output seen before the recession began more than four years ago. Activity is still about 4 percent below its early-2008 peak. Only Italy among Group of Seven nations is further behind.

Still, developed economies remain under pressure as the European debt crisis persists. German unemployment climbed a sixth month in September, with the number of jobless rising a seasonally adjusted 9,000 to 2.91 million, data today showed.

Economic confidence in the euro area unexpectedly fell in September. The European Commission’s index of executive and consumer sentiment dropped to 85 from 86.1 in August. Economists had forecast no change, according to the median of 28 predictions in a Bloomberg News survey.

U.S. Economy

The economy in the U.S. grew less than previously forecast in the second quarter, reflecting slower gains in consumer spending and farm inventories, a report today showed. The world’s largest economy expanded at a 1.3 percent pace from April through June after growing at a 2 percent rate in the first quarter. The revision compared with a prior estimate of 1.7 percent.

U.K. second-quarter output was depressed by wet weather and an extra public holiday to celebrate Queen Elizabeth II’s 60 years on the throne. Recent retail sales and production data suggest growth resumed in the third quarter. The ONS will tomorrow release its estimate of services output in July.

Between April and June, construction output fell 3 percent instead of a previously estimated 3.9 percent drop and manufacturing slipped 0.8 percent rather than 0.9 percent. The decline in overall industrial production was revised to 0.7 percent from 0.9 percent. Services, the largest part of the economy, shrank an unrevised 0.1 percent.

Pressure Easing

Pressure on household budgets is easing, although an inflation rate of 2.5 percent continues to outstrip wage increases. Employment increased to a four-year high of 29.6 million in the three months through July. Inflation will be around the central bank’s 2 percent target in the coming years, Fisher said.

“We are very seldom going to be actually at 2 percent, we’ll always be a bit away and trying to bring it back,” Fisher told the Sun, according to a correction issued by the central bank today. “So our forecast has inflation within this sort of range -- either a bit above or a bit below -- for the next two or three years.”

The Bank of England has kept rates at a record low and increased its emergency stimulus program to 375 billion pounds to revive growth. It also introduced a Funding for Lending Scheme last month to boost credit to companies and households.

The Bank of England’s Financial Policy Committee said in a record of its Sept. 14 meeting published today that banks’ efforts to raise capital to improve stability may be impaired by slow earnings growth. U.K. lenders “should supplement internal capital generation by seeking opportunities to raise capital externally,” the record said.

To contact the reporters on this story: Svenja O’Donnell in London at sodonnell@bloomberg.net; 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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