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U.K. Consumers Drive Recovery as Growth Accelerates to 0.8%

Pedestrians carry shopping bags and use mobile handsets as they walk along Oxford Street in London. Consumer spending rose 0.8 percent in the first quarter. Photographer: Simon Dawson/Bloomberg
Pedestrians carry shopping bags and use mobile handsets as they walk along Oxford Street in London. Consumer spending rose 0.8 percent in the first quarter. Photographer: Simon Dawson/Bloomberg

May 22 (Bloomberg) -- U.K. consumers were the driving force behind Britain’s economic growth at the start of the year, continuing a trend after they led the recovery in 2013.

Consumer spending rose 0.8 percent in the first quarter, a 10th straight increase, adding 0.5 percentage point to gross domestic product. The economy grew 0.8 percent in the period, up from 0.7 percent in the fourth quarter of 2013, the Office for National Statistics said. Business investment increased 2.7 percent, following a 2.4 percent gain the previous quarter.

“It is little surprise that consumption remains a significant driver of output growth, but the rise in business investment is a major plus and helps give the impression that the recovery is broadening out,” said David Tinsley, an economist at BNP Paribas SA in London. Other evidence suggests that “growth in GDP in the second quarter can surpass that in the first quarter.”

Britain’s recovery has left GDP just 0.6 percent below where it was at its peak in the first quarter of 2008. The improvement was underscored by data yesterday showing a faster-than-forecast increase in retail sales in April.

The brighter outlook is also having an impact at the Bank of England, where some policy makers are moving closer to calling for an interest-rate increase. Minutes of the Monetary Policy Committee’s most recent meeting, published yesterday, showed the argument for higher rates is becoming “more balanced” for some on the nine-member panel.

Rate Bets

The central bank will raise its key rate from a record low 0.5 percent in April, according to forward contracts on the sterling overnight interbank average, or Sonia.

While the outlook and the data indicate a squeeze on consumers is easing, Prime Minister David Cameron’s Conservative Party trails the opposition Labour party in polls. The Tories are expected to come third behind Labour and the U.K. Independence Party in European elections being held today.

Exports fell 1 percent in the quarter and imports dropped 1.1 percent, leaving net trade to have zero impact on GDP, today’s report showed. Government spending rose 0.1 percent. Gross fixed capital formation added 0.3 percentage point.

In a separate release, the ONS said Britain had a larger-than forecast budget deficit in April as tax income slid and the financial position of local authorities weakened. Net borrowing was 11.5 billion pounds ($19.4 billion) compared with 9.5 billion pounds a year earlier. That compares with the median forecast of 8.4 billion pounds in a Bloomberg survey.

Budget Cuts

While the recovery is strengthening, Chancellor of the Exchequer George Osborne has warned that five more years of budget cutting is needed to balance the books.

The pound slipped 0.2 percent to $1.6866 at 10:21 a.m. London time. Sterling weakened 0.1 percent to 81.10 pence per euro, after appreciating to 80.86 pence yesterday, the strongest level since January 2013.

First-quarter production growth was revised down to 0.7 percent from 0.8 percent in the initial GDP release. Growth in services, the largest part of the economy, was unchanged at 0.9 percent, and construction was raised to 0.6 percent from 0.3 percent. From a year earlier, the economy grew 3.1 percent, the ONS said, unrevised from the initial estimate. That’s the biggest annual increase since the fourth quarter of 2007.

Today’s report “provides more evidence that the economic recovery is based on solid foundations,” said Samuel Tombs, an economist at Capital Economics Ltd. in London. “With a strong rebound in investment enhancing the economy’s productive capacity, the recovery is unlikely to hit the buffers and generate inflation soon.”

To contact the reporter on this story: Fergal O’Brien in London at fobrien@bloomberg.net

To contact the editors responsible for this story: Craig Stirling at cstirling1@bloomberg.net Emma Charlton, Andrew Atkinson

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