U.K. Disposable Income Plunges as Economy Contracts 0.3%

U.K. Disposable Income Plunges as Economy Contracts 0.3%
London-based J Sainsbury Plc, the U.K.’s third- largest supermarket company, said June 13 sales growth slowed in the first quarter as a soggy start to the summer led to fewer barbecues during three-day weekends. Photographer: Chris Ratcliffe/Bloomberg

Britons’ disposable income fell for a second quarter in the first three months of the year, when consumer spending unexpectedly declined and the economy shrank.

Real disposable income dropped 0.9 percent from the previous three months, when it also fell by that amount, the Office for National Statistics said today in London. Consumer spending was revised to a 0.1 percent decline from a 0.1 percent increase, while gross domestic product fell 0.3 percent.

The Bank of England is edging closer to resuming bond purchases to kickstart a recovery as the euro-area debt crisis worsens and the U.K. struggles to shake off a recession. With consumers confidence under pressure, Chancellor of the Exchequer George Osborne this week scrapped a planned fuel-duty increase, his fourth policy U-turn in a month, a move he said was aimed at helping people at a “very difficult economic time.”

“It looks highly questionable whether the economy has been able to return to growth in the second quarter,” said Howard Archer, an economist at IHS Global Insight in London, citing “intensified problems” in the euro area. The economy may begin to recover after that, helped by “ultra accommodative monetary policy,” he said.

The decline in GDP matched a previous estimate published last month and the median forecast of 29 economists in a Bloomberg survey. The pound was little changed against the dollar after the data were released. It traded at $1.5538 as of 10:51 a.m. in London, down 0.2 percent from yesterday.

Consumer Spending

The decline in consumer spending in the first quarter followed a 0.5 percent increase in the October-December period and declines in the preceding three quarters. Real disposable income is now at its lowest in three years. The savings ratio declined to 6.4 percent from 6.9 percent, the lowest in a year.

London-based J Sainsbury Plc, the U.K.’s third-largest supermarket company, said June 13 sales growth slowed in the first quarter as a soggy start to the summer led to fewer barbecues during three-day weekends.

Mulberry Group Plc, a British luxury-handbag maker, said on June 14 that it remains “cautious” on the outlook because of the “adverse macro-economic climate.” Retail-sales growth slowed to 12 percent in the 10 weeks since the end of March from 36 percent in the last fiscal year, the company said.

Exports Drop

Today’s report also showed that exports dropped 1.7 percent in the first quarter and imports fell 0.3 percent. Government spending increased 1.9 percent.

Production fell 0.5 percent in the quarter through March, revised from a 0.4 percent decline, the statistics office said. Construction was revised to a 4.9 percent decline from 4.8 percent, while services grew 0.2 percent, more than the 0.1 percent previously estimated.

The debt crisis in Europe, Britain’s biggest trading partner, is weighing on growth, as are tighter lending conditions as banks grapple with higher funding costs. European leaders will gather for a summit in Brussels today to seek a resolution to the debt turmoil as governments clash over issues such as euro bonds.

“This tightening in financial conditions has affected demand in the economy,” Bank of England policy maker Ben Broadbent said in his annual report, published on June 26. The outlook is that “output is broadly flat in the next quarter or two, as it has been for the past eighteen months.”

Broadbent was among a majority of policy makers who voted this month to leave the central bank’s bond-purchase target at 325 billion pounds ($505 billion), defeating a push by Governor Mervyn King and three other officials to increase it. The bank announces its next policy decision on July 5.

Fiscal Squeeze

The government’s fiscal squeeze is also hampering demand. While the opposition Labour Party has accused the coalition of dragging the U.K. into a double-dip recession, Prime Minister David Cameron says the plans are supporting the economy by holding down borrowing costs.

The budget program came under attack this week after data showed Britain had a larger budget shortfall than economists forecast in May as the recession hit taxes and pushed up welfare spending. Osborne this week scrapped a planned increase in fuel duty due to take effect in August.

In a separate report, the statistics office said business investment rose 1.9 percent in the first quarter from the previous three months and was up 14.8 percent from a year earlier. The balance of payments report showed that the current account deficit widened to 11.2 billion pounds from 7.2 billion pounds in the fourth quarter of 2011.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE