U.K. Recovery Weaker Than Estimated as Deficit Widens

Photographer: Simon Dawson/Bloomberg

Two reports earlier this week showed consumer spending remains sluggish, and a sentiment index fell more than economists forecast in December Close

Two reports earlier this week showed consumer spending remains sluggish, and a... Read More

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Photographer: Simon Dawson/Bloomberg

Two reports earlier this week showed consumer spending remains sluggish, and a sentiment index fell more than economists forecast in December

Britain’s economy expanded less than previously estimated in the third quarter and the budget deficit unexpectedly widened in November, complicating Prime Minister David Cameron’s attempts to bolster the recovery.

Gross domestic product rose 0.9 percent from the second quarter, down from a previous estimate of 1 percent, the Office for National Statistics said today in London. The deficit excluding government support for banks was 17.5 billion pounds ($28 billion), which compared with 16.3 billion pounds a year earlier and the median forecast of 16 billion pounds in a Bloomberg News survey of 19 economists.

The Office for Budget Responsibility cut its growth forecasts this month and said Chancellor of the Exchequer George Osborne will miss his target of cutting the burden of government debt by 2015, prompting warnings that Britain could lose its top credit rating. The third-quarter growth surge may prove short lived, with the Bank of England warning the economy may shrink this quarter and forecasting stagnant output in the near term.

“We’re expecting a fairly sluggish fourth quarter and the public deficit doesn’t seem to be coming down as rapidly,” said Peter Dixon, an economist at Commerzbank AG in London. “The future will be one of modest fiscal retrenchment.”

The growth in the three months through September was the first for the U.K. since the third quarter of 2011. From a year earlier, GDP was unchanged, the statistics office said.

The pound remained lower against the dollar after the data were published. It was trading at $1.6245 as of 11:12 a.m. in London, down 0.2 percent from yesterday.

GDP Revisions

Today’s report showed that manufacturing and production output both rose 0.7 percent, less than the 0.9 percent previously estimated. Services growth was revised to 1.2 percent from 1.3 percent, while construction fell by 2.5 percent, less than the 2.6 percent earlier reported.

The household savings ratio rose to 7.7 percent in the three months through September from 7.4 percent in the previous quarter, the highest since the third quarter of 2009. Real household disposable income increased 0.4 percent after a 2.3 percent gain in the second quarter.

Consumer spending was revised to show growth of 0.2 percent in the second quarter and 0.5 percent in the first. Previously, it was estimated to have fallen in the second quarter and risen 0.3 percent in the three months through March.

This “suggests a much stronger recovery in consumer spending in 2012,” said Andrew Goodwin, an economist at the Ernst & Young ITEM Club in London. “This is the result of strong employment growth and lower inflation. With inflation expected to slow further, this must offer some hope that the recovery can be sustained.”

Deficit Measures

The weak economy is hampering Osborne’s efforts to narrow the budget deficit. Today’s public-finance data showed that revenue was held back last month by a 12 percent drop in income- tax receipts to 9.2 billion pounds. That was partly offset by taxes on corporate profits, which rose 18 percent to 1.6 billion pounds.

Welfare costs rose 5 percent on the year and central- government spending jumped 9 percent, partly reflecting payments to local academies. There was also an increase in capital investment.

“Today’s various data underline what the chancellor said to parliament at the autumn statement: that it’s taking time, but the British economy is healing,” the Treasury said in a statement. “The deficit is down by a quarter since 2010, and more than a million private-sector jobs have been created.”

BOE Policy

The statistics office also published a report showing business investment rose 3.8 percent in the third quarter from the previous three months and was up 5.1 percent on the year. In a separate release, it said an index of services rose 0.1 percent in October from September and increased 2 percent from the year-earlier month.

The Bank of England has halted its bond-buying stimulus program, though with the outlook still uncertain, it has left the door open to more loosening if needed.

In the minutes of their Dec. 5-6 meeting, policy makers said the “immediate risks emanating from the euro area seemed less pressing than they had in the summer, and financial-market sentiment had improved.” They added that the “drag from fiscal consolidation and rebalancing in the periphery was likely to continue into the medium term.” Recent data pointed to a “continuing contraction in the euro area, but a stabilization in global growth.”

U.S. Outlook

Data yesterday showed the U.S. economy grew at a 3.1 percent annual rate in the third quarter, more than previously reported. Still, the world’s largest economy will be hard- pressed to maintain that pace as global demand cools and companies limit spending and hiring ahead of looming tax increases and spending cuts. The index of U.S. leading indicators fell 0.2 percent in November, according to a separate report, pointing to a slowdown in the economy early next year.

Later today, a report from the Commerce Department will probably show that U.S. consumer spending rose in November as Americans set aside the threat of higher taxes next year while shopping for the holidays.

Household purchases increased 0.4 percent after falling 0.2 percent in October, according to the median estimate from 66 economists surveyed by Bloomberg. Other reports may show home sales and demand for long-lasting goods climbed.

The Chicago Fed releases its National Activity Index for November and the University of Michigan unveils a consumer confidence index for December.

To contact the reporters on this story: Fergal O’Brien in London at fobrien@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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