U.K. Recovery Seen at Risk as Rebalancing Eludes Economy

Britain’s consumer and housing-driven recovery, the fastest among Group of Seven nations, risks losing steam unless export growth picks up, economists said.

While the economy grew the fastest in more than two years in the three months through September, the expansion was led by consumer spending, construction and stock building. Net trade knocked 0.9 percentage point off GDP, the most since the second quarter of 2011.

Bank of England Governor Mark Carney this week extolled the strength of the economy’s revival, while acknowledging that weak growth in the euro area may weigh on the export outlook and limit rebalancing of the economy. Part of the domestic demand is linked to a revival in the housing market, which has fueled concerns of a brewing bubble. Carney will address those risks at a press conference in London today.

“The consumer is a big part of the economy, so it’s always going to be an important component of growth but it shouldn’t be the sole component,” said Carl Astorri, senior economic adviser to the EY ITEM Club. “To get the stronger recovery that we’re forecasting for next year does rely on it broadening out.”

The U.K. economy grew 0.8 percent in the last quarter, the Office for National Statistics said yesterday. Investment in private-sector dwellings climbed 5.9 percent, the most in two years. Consumer spending increased for an eighth consecutive quarter. Exports, which account for about one third of the economy, fell 2.4 percent, the most in more than two years.

Financial Stability

Carney is scheduled to speak at 10:30 a.m. London time, when he will release the central bank’s semi-annual Financial Stability Report. He said last month that the BOE has the tools to ensure housing “isn’t in a boom and then a bust phase.”

In addition to government measures, housing-market activity is also being fueled by the promise of low borrowing costs. With the sustainability of the recovery still not assured, the Monetary Policy Committee has said it won’t consider raising interest rates for some time.

If growth remains skewed toward the consumer “it would make the economy very sensitive to interest rates and would limit the extent to which the MPC would be able to raise interest rates,” Astorri said. He forecasts expansion will accelerate to 2.4 percent next year from 1.4 percent in 2013.

G7 Leader

In the third quarter, Britain’s economic growth led G-7 nations, according to data from the Organisation for Economic Cooperation and Development. German growth slowed to 0.3 percent from 0.7 percent. Based on an equivalent measure, U.S. GDP rose 0.7 percent.

BOE Chief Economist Spencer Dale said yesterday at a Treasury Committee hearing that “for sustainable growth what we need to see is stronger investment.” While business investment rose 1.4 percent in the third quarter, that’s only half the 2.7 percent drop in the previous three months. From a year earlier, investment was down 6.3 percent.

Carney said at the same testimony that demand needs to pick up before business investment will improve and he cautioned that the burden will fall on the domestic market.

“If you look at the situation the U.K. is in right now, that demand is not going to come from outside our shores,” he said. “The euro zone has improved somewhat but is still very weak, effectively a stagnation.”

The recovery in the euro-area, Britain’s largest trading partner, came close to a halt in the third quarter as growth cooled to 0.1 percent from 0.3 percent in the second quarter. The 17-nation bloc’s jobless rate held at a record 12.2 percent in October, economists said before a report on Nov. 29.

“Since the beginning of the year we have seen the pace of growth gain momentum and a sustained recovery appears to be in train” in the U.K., said Blerina Uruci, an economist at Barclays Plc. “The economy still faces significant headwinds, not least from a fragile recovery in the euro area.”

Inflation Squeeze

The recovery’s reliance on consumer spending makes it vulnerable to pressures on incomes from rising energy costs and inflation. Pay growth slowed to 0.7 percent in the last quarter from 0.8 percent, while inflation was at 2.2 percent in October.

The Centre for Economics and Business Research said today while its index of consumer confidence rose this month, the increase was the smallest since February.

A gauge of sentiment was 110.1, up 0.7 point from October, the CEBR and YouGov Plc said. Optimism is starting to level off after a surge at the start of the year because people’s view of their finances is lagging their outlook for house prices and business activity, they said.

“If the recovery is to be sustained at a healthy pace, it really does need a marked, extended pick up in business investment,” said Howard Archer, an economist at IHS Global Insight in London. “Consumer spending will likely remain decent, but there has to be a limit to its upside until the squeeze on purchasing power eases appreciably.”

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