U.K. Economy Shrinks 0.5%, Less Than Previously Estimated

U.K. Economy Shrinks 0.5%, Less Than Previously Estimated
The GDP report showed production output growth was revised to 0.8 percent in the fourth quarter from 0.7 percent. Photographer: Simon Dawson/Bloomberg

Britain’s economy shrank less than previously estimated in the fourth quarter as services and factory output was revised higher.

Gross domestic product fell 0.5 percent from the previous three months, the Office for National Statistics said today in London. That compares with an earlier estimate of 0.6 percent, which was also the median forecast of 24 economists in a Bloomberg News survey. Excluding the impact of the coldest December in a century, growth was “broadly flat,” the statistics office said.

The Bank of England is holding off raising interest rates to support a faltering recovery even after inflation accelerated to the fastest pace in more than two years. The Office for Budget Responsibility last week cut its forecast for 2011 economic growth to 1.7 percent from 2.1 percent, while central bank policy makers saw “merit in waiting” to assess the impact of rising oil prices and the budget squeeze on the economy.

“Consumer spending is going to struggle this year and that’s going to set the overall tone for growth, which is going to be pretty sluggish,” said Alan Clarke, an economist at BNP Paribas SA in London. “It’s an incredibly close call for the BOE. Inflation is running at double what household incomes are going up by.”

The pound remained higher against the dollar after the report and traded at $1.6018 as of 10:55 a.m. in London, up 0.2 percent on the day. Bonds were little changed, with the yield on the 10-year gilt at 3.6 percent.

Mortgage Approvals

In a separate release, the Bank of England said U.K. mortgage approvals rose to 46,967 in February, the highest level since November, from 46,152 in January. Economists forecast 46,000, based on the median forecast of 15 estimates in Bloomberg News survey.

The GDP report showed investment fell 1.8 percent in the fourth quarter, less than the 2.5 percent initially estimated. Production output growth was revised to 0.8 percent from 0.7 percent, while the decline in services was revised to 0.6 percent from 0.7 percent. Government spending rose 0.4 percent in the fourth quarter, exports increased 1.7 percent, while imports jumped 3.2 percent, the most in a year.

Consumer spending fell 0.3 percent in the fourth quarter from the previous three months, when it stagnated. Thomas Cook Group Plc, Europe’s second-biggest tour operator, said it has seen “a weaker picture in the U.K., where recent trading has also been affected by fragile consumer sentiment.”

Current Account

The ONS also reported today that business investment was unchanged in the fourth quarter from the previous three months, and was up 12.2 percent on the year.

The current account deficit widened to 10.5 billion pounds ($16.8 billion) from 8.7 billion pounds in the previous three months. As a percentage of GDP, the deficit was 2.9 percent. The deficit on trade in goods was 26.8 billion pounds in the fourth quarter, the largest since quarterly records began in 1955. The deficit on current transfers was also at a record in the quarter, at 6.1 billion pounds.

As the government cuts spending to reduce the budget deficit and soaring oil prices squeeze households’ incomes, the Bank of England kept its benchmark interest rate at a record-low 0.5 percent this month.

Deputy Governor Charles Bean said in an interview with the London-based Times newspaper this month that he favors delaying rate increases while the recovery remains fragile. Business Secretary Vince Cable said yesterday the Bank of England’s loose monetary policy has been “very helpful to the government.”

Government Borrowing

The surge in commodity costs has also hit companies’ profits. Severfield-Rowen Plc, a U.K. supplier of structural steelwork, said March 22 that profit plunged 76 percent last year as the government fiscal squeeze and rising steel prices hurt demand.

Chancellor of the Exchequer George Osborne said in his annual budget last week that the U.K. will need to borrow more than previously thought over the next five years. He maintained plans to eliminate the bulk of the deficit by 2015. Osborne also cut fuel duty and lowered the income-tax bill for most Britons to alleviate the squeeze on living standards. Inflation accelerated to 4.4 percent in February while a gauge of consumer confidence fell to a record low.

“This upward revision to growth continues to show the manufacturing sector performing well, which, supported by the actions announced in the budget and the ‘Plan for Growth,’ will help promote a rebalancing of the economy,” the U.K. Treasury said today.

Ross Walker, an economist at Royal Bank of Scotland Group Plc, said the fourth-quarter data leaves “the big picture essentially unaltered.”

It’s a “a sluggish, sub-trend recovery,” he said.

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