Britain’s economy avoided a triple-dip recession in the first quarter with expansion that exceeded economists’ forecasts and will provide relief to a government criticized for failing to foster a recovery.
Gross domestic product rose 0.3 percent in the period, the Office for National Statistics said today in London. The median forecast of 37 economists in a Bloomberg News survey was for 0.1 percent growth. From a year earlier, GDP rose 0.6 percent, the most since the fourth quarter of 2011. The pound surged.
Chancellor of the Exchequer George Osborne said today that the data are an encouraging sign that the economy is healing, a week after he defended austerity measures following a call by the International Monetary Fund to relax fiscal tightening. The Treasury and Bank of England yesterday extended their credit-boosting program and warned that risks of renewed stresses in bank funding markets remain because of the euro-area crisis.
“It’s quite encouraging,” said David Tinsley, an economist at BNP Paribas in London and a former central bank official. “It probably eases pressure on the chancellor and enables him to push back on criticism of his strategy.”
Osborne is pursuing an austerity program that is set to continue until 2018 as he struggles to bring down a budget deficit that totalled 7.8 percent of GDP in the last fiscal year. The economy's weakness forced him to abandon a 2010 commitment to erase the bulk of the shortfall by 2015. Spending cuts and tax increase will amount to 130 billion pounds ($201 billion) by 2016, according to Treasury estimates.
Services expanded 0.6 percent in the first quarter from the previous three months, boosted by distribution, hotels and restaurants, the statistics office said. Production increased 0.2 percent, led by a 3.2 percent surge in mining and quarrying, while construction shrank 2.5 percent.
The pound soared against the dollar after the data were published and was up 1.1 percent from yesterday at $1.5438 as of 10:41 a.m. in London.
Michael Amey, a portfolio manager at Pacific Investment Management Co., told Bloomberg Television’s Francine Lacqua on “The Pulse” that the GDP result reduces the chances of the Bank of England expanding quantitative easing next month. Gilts declined, pushing the 10-year yield up 3 basis points to 1.72 percent.
The statistics office said that snowfall and cold weather during the first quarter appear to have had a “limited impact” on GDP. “The strongest evidence was that it reduced retail output in January and March 2013, but boosted demand for electricity and gas,” it said.
Today’s report is a preliminary estimate and based on about 44 percent of the data that will ultimately be available. Six of the 37 economists in the Bloomberg survey predicted a contraction.
While the U.S., German and Canadian economies are back above their pre-recession levels, U.K. GDP remains 2.6 percent below its peak in the first quarter of 2008. It means Britain remains mired in its longest peacetime slump of any since at least 1920, according to the National Institute of Economic and Social Research.
The economy has grown 1.2 percent since the third quarter of 2010, just after the Conservative-Liberal Democrat coalition came to power in May of that year.
Recovery prospects remain hampered by the debt crisis in the euro area sapping demand in the biggest market for British goods, while inflation running at 2.8 percent eats into household incomes. The 17-nation euro region shrank 0.1 percent in the first quarter, according to a Bloomberg survey published on April 11. The official figures will be released on May 15.
Spanish data released today showed that unemployment rose to the highest in at least 37 years. The rate climbed to 27.2 percent of the workforce and the number of jobless exceeded 6 million for the first time.
While economists from banks including UBS AG and Royal Bank of Scotland Group Plc now predict the European Central Bank will reduce interest rates next week, Executive Board member Joerg Asmussen cautioned in a speech today that “the pass-through of rate cuts to the periphery would be limited, and this is where they are most needed.”
Unilever Plc, the world’s second-biggest consumer-goods company, reported the slowest quarterly growth in two years today as demand in Europe was held back by weaker consumer confidence. Sales fell 3.1 percent in Europe, the biggest decline in more than three years, according to the London- and Rotterdam-based company.
A pickup in growth in the U.S. may help. The world’s biggest economy grew in the first quarter at a 3 percent annual rate after expanding at a 0.4 percent pace in the final three months of 2012, according to the median forecast in a survey. The data will be released by the Commerce Department tomorrow.
In Asia, data showed that South Korea’s economy grew the most in two years in the first quarter as the government front-loaded spending and exporters weathered the slide in the yen that aids rivals in Japan. GDP rose 0.9 percent from the previous three months.
BOE policy makers have split on the need to provide more stimulus to the British economy through QE. Governor Mervyn King has wanted to buy more bonds for three consecutive months but has been outvoted by a majority on the nine-member Monetary Policy Committee, minutes of their meetings show.
Fitch Ratings last week became the second ratings company to strip Britain of its top credit grade and the IMF urged Osborne to consider putting a brake on budget cuts as it lowered its 2013 growth forecast to 0.7 percent. Officials from the Washington-based lender will visit London next month to present their audit of the U.K. economy.
Prime Minister David Cameron’s Conservative Party trails behind the Labour opposition by about eight percentage points in recent polls, with a general election two years away.
“Despite a tough economic backdrop, we are making progress,” Osborne said in a statement released by the Treasury. “We all know there are no easy answers to problems built up over many years, and I can’t promise the road ahead will always be smooth, but by continuing to confront our problems head on, Britain is recovering.”
Ed Balls, the opposition Labour Party’s finance spokesman, said in a statement that the U.K. economy is in its slowest recovery for 100 years.
“These lackluster figures show our economy is only just back to where it was six months ago and continue the picture of flatlining,” he said.
Funding for Lending
The Bank of England is currently focusing stimulus efforts on its Funding for Lending Scheme, which began in August to give banks access to cheaper funding provided they pass on the savings to businesses and consumers. The revamp of the program announced yesterday is aimed at boosting lending to smaller firms, while the plan is also being expanded to allow access to some non-bank lenders such as financial leasing corporations.
“The GDP figures are good news just when we needed it,” Graeme Leach, chief economist at the Institute of Directors, a London-based lobby group with 38,000 members from U.K. companies, said in a statement. “We shouldn’t get too excited about 0.3 percent quarterly growth, but it does provide relief from all the doom and gloom.”