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U.K. Fourth-Quarter Disposable Income Falls as GDP Shrinks

March 27 (Bloomberg) -- Britons’ disposable income fell in the fourth quarter, underlining the pressure on consumers as the economy teeters on the brink of an unprecedented triple-dip recession.

Household incomes adjusted for inflation declined 0.1 percent from the previous three months, the Office for National Statistics said today in London. Gross domestic product fell 0.3 percent, the same as previously estimated.

The Office for Budget Responsibility cut its growth forecasts last week and Chancellor of the Exchequer George Osborne said it will take longer than previously thought to bring debt under control, prompting Fitch Ratings to move a step closer to stripping the country of its top credit rating. GDP is at risk of contracting again this quarter, marking the third recession in five years. Concern over the economy has weighed on the pound this year.

“Today’s figures confirm that the U.K. economy finished last year on a very weak footing and keep alive the risk of a triple-dip recession,” said Samuel Tombs, an economist at Capital Economics Ltd. in London. “The figures are therefore a timely reminder of how much progress still needs to be made towards getting the economy back to a sustainable path.”

A separate statement from the Bank of England said U.K. lenders must raise 25 billion pounds ($38 billion) to make up a shortfall in capital to cover higher estimates for expected loan losses, potential fines and better risk calculations.

Trade, Investment

The pound fell against the dollar after the reports and was trading at $1.5103 as of 12:50 p.m. in London, down 0.4 percent on the day. The yield on the benchmark 10-year U.K. government bond dropped 6 basis points to 1.73 percent.

Today’s ONS report confirmed that trade and investment acted as the biggest drag on the economy in the fourth quarter, casting doubt on Prime Minister David Cameron’s claim to be rebalancing the economy away from spending by consumers and the government.

Exports fell 1.6 percent and net trade contributed 0.2 percentage point of the overall decline in GDP, suggesting exporters are seeing little benefit from the pound’s decline.

The current-account deficit narrowed to 14 billion pounds in the fourth quarter from 15.1 billion pounds in the previous three months, the ONS said separately today. While the trade balance widened, Britain swung to a surplus on its income balance.

Business Investment

Business investment fell 0.8 percent in the quarter instead of the 1.2 percent decline previously estimated, wiping 0.1 point from GDP. Consumer spending rose 0.4 percent instead of 0.2 percent.

On the output side, there was a downward revision to industrial production, which fell 2.1 percent, the most since 2009, amid shutdowns of North Sea oil production. Services were unchanged, revised from a drop of 0.1 percent. GDP excluding oil and gas extraction fell 0.1 percent on the quarter.

The household savings ratio fell to 6.7 percent in the final three months of 2012 from 7.9 percent in the previous quarter. The ratio climbed to 7.1 percent last year, the highest since 1997, as people chose to save rather than spend.

Net disposable income rose 2.1 percent last year, the biggest increase since 2003. While an increase in the number of people in work lifted wages and salaries by 3 percent, just above the rate of consumer-price inflation, basic pay is rising at a slower pace. Earnings were also boosted by social benefits and dividends.

Lagging Behind

The weak economy is hampering Osborne’s efforts to narrow the budget deficit. In his budget last week, the chancellor conceded borrowing will be more than 50 billion pounds higher than previously estimated over the coming years after the OBR cut its forecasts.

Britain has recovered only half of the output lost in the 2008- 2009 recession, and the country forfeited its top credit rating at Moody’s Investors Service on Feb. 22. By contrast, output in the U.S. is back above its pre-slump peak and the recovery is gaining pace. The OBR, Osborne’s fiscal watchdog, estimates the British economy will grow 0.6 percent this year, half the pace predicted in December.

With exports to the euro region falling and freezing weather keeping shoppers at home this month, Britain is relying on a strong performance from the service sector, which accounts 77 percent of GDP, to prevent a further contraction in the first quarter. Figures tomorrow are forecast to show services shrank 0.2 percent in the three months through January, according to a Bloomberg survey. The initial estimate of GDP in the first quarter is due on April 25.

Monetary Activism

Osborne is largely relying on the Bank of England to pursue “monetary activism” to aid the economy as his budget cuts, the euro-region crisis and the squeeze on incomes from above-target inflation depress demand.

Governor Mervyn King and two other officials were defeated for a second month in their bid to add to the 375 billion pounds of assets bought as part of quantitative easing since March 2009.

In 2012, GDP rose 0.3 percent, revised from a previous estimate of 0.2 percent, with consumer spending providing a key boost and net trade weighing on the economy. Excluding oil and gas extraction, which plunged by 10.7 percent last year, the economy grew by 0.5 percent.

The current-account deficit almost tripled to 57.7 billion pounds. That’s 3.7 percent of GDP, the most since 1989. The increase was due to a widening trade deficit and the loss of investment income.

To contact the reporters on this story: 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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