U.K. Seen Growing Most Since 2007 as Carney Primes Phase Two
Britain’s economy probably capped its best year of growth since 2007 during the last quarter, bringing Mark Carney closer to completing what he calls the “first phase” of his low interest-rate policy.
Gross domestic product rose 0.7 percent, near the 0.8 percent pace of the previous three months, according to the median of 39 estimates in a Bloomberg News survey. The data due tomorrow would mark the first full year since the financial crisis when the economy sustained expansion in every quarter.
Carney, the Bank of England governor, repeated at the weekend that he wants exceptionally loose monetary policy for some time to give an extra fillip to growth that remains uneven. The Monetary Policy Committee is waiting for business investment to join a revival in consumer spending, something it forecasts may start later this year.
“There’s a natural momentum, there’s a self-reinforcing cycle, as credit comes back and people spend, profits rise, and companies hire more workers,” said James Carrick, a London-based economist at Legal & General Investment Management and a former U.K. Treasury official. “The BOE has successfully broken the downward spiral in credit creation.”
The Office for National Statistics will release the fourth-quarter GDP data, with a breakdown of services, construction and industrial production, at 9:30 a.m. tomorrow in London. Forecasts in the Bloomberg survey range from 0.3 percent by economists at Natixis to 1 percent at Informa Global Markets.
The pound advanced 0.6 percent to $1.6574 at 2:40 p.m. London time after rising to $1.6668 on Jan. 24, the highest since May 2011. Sterling strengthened 0.6 percent to 82.46 pence per euro.
While Britain is the first Group of Seven nation to release a full GDP report for the final three months of 2013, German officials have already estimated their economy grew by a quarter of a percent. U.S. data due Jan. 30 will show expansion at a 3.2 percent annualized rate, compared with 4.1 percent in the prior quarter, another survey of economists shows.
Prime Minister David Cameron said today that while the U.K. economy is recovering, there is still further to go.
“If you look at the most recent data on the economic figures it’s shown quite a balanced recovery,” he said in a BBC Radio interview. “Do I want to see to more growth outside London and the southeast? Yes. Do I want to see more export-led growth and manufacturing growth? Yes, absolutely, and that’s all part of the long-term economic plan.”
Cameron has also backed Carney at a time when the economy’s momentum has forced the governor and his officials to reconsider their approach to forward guidance, aimed at persuading people that borrowing costs aren’t about to increase.
Speaking in Davos on Jan. 25, Carney welcomed the U.K. pickup and then reiterated that it’s too early to raise interest rates even if the recovery drives unemployment down to 7 percent, his threshold to reconsider monetary-policy settings.
“Our first phase of forward guidance, with a 7 percent threshold for the unemployment rate, is approaching -- we don’t know exactly when -- but approaching the achievement of that threshold,” Carney said. “We have already said that there is no immediate need to raise interest rates.”
His assurance earlier in the week about keeping interest rates low, tempering news of a drop in the jobless rate to 7.1 percent, didn’t prevent Citigroup Inc. from predicting an increase in borrowing costs later this year. Enthusiasm for the U.K.’s prospects also pushed the pound to a 2 1/2-year high versus the dollar after its biggest weekly jump in a month.
“The recovery has been about animal spirits and about confidence,” said Grant Lewis, an economist at Daiwa Capital Markets in London and a former Treasury official. “Ultimately there was a shift in confidence, which started in the consumer sector. Looking ahead, it’s hard to see what’s going to stop it, because all the news is good.”
The weakness of the euro region, the country’s biggest trading partner, featured on a list Carney relayed on a World Economic Forum panel in Davos alongside colleagues including European Central Bank President Mario Draghi and Bank of Japan Governor Haruhiko Kuroda. Also hindering the recovery is the strength of the pound, as well as legacies of debt faced by consumers, the public sector and the finance industry, he said.
“As good as the numbers have been in the last three quarters in the United Kingdom, we’re talking about three quarters of household-led growth, an economy that’s running 20 percent below pre-crisis trends, that has substantial spare capacity, that has not yet rebalanced,” Carney said. “In that environment, exceptional stimulus remains very relevant.”
The MPC has 10 days left to rethink its policy before announcing its next interest-rate decision. Less than a week later on Feb. 12, Carney will present new forecasts at a press conference that may also prove an opportunity to explain how the next phase of his forward guidance might look like. In the meantime, the governor insists that any cycle of rate increases that might follow will be “gradual.”
Economists including Carrick at Legal & General say that, given such assurances that higher interest rates won’t impede the recovery, further expansion is likely to take hold.
“Policy makers have pressed all the buttons to get the economy going,” Carrick said. “We see very strong growth this year.”
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