U.K. 4Q GDP Grows 0.7% to Cap Best Year Since 2007

The U.K. economy expanded 0.7 percent in the fourth quarter, ending the best year since 2007 amid growth in every industry except construction.

The increase in gross domestic product followed a 0.8 percent gain in the third quarter, the Office for National Statistics said today in London. It was in line with the median forecast in a Bloomberg News survey of 39 economists. Business services and finance contributed more than half of the gain.

The strength of the economy pushed the pound to a 2 1/2 year high against the dollar this month and is forcing Bank of England officials to reconsider their forward guidance, a policy aimed at persuading consumers and businesses that borrowing costs will stay low. BOE Governor Mark Carney, who is due to present new economic forecasts on Feb. 12, last weekend repeated that he wants to keep policy loose for some time to bolster growth that remains uneven.

“While the U.K. economy’s performance in 2013 was well above expectations and encouraging, it needs to be borne in mind that the improvement has come from a low base,” said Howard Archer, an economist at IHS Global Insight in London. “The Bank of England continues to place great emphasis on the fact that the recovery is coming from a low base and that significant headwinds could still derail it.”

The pound was at $1.6602 at 2:47 p.m. London time, up 0.1 percent on the day. It reached $1.6668 on Jan. 24, the highest level since May 2011. Sterling strengthened 0.1 percent to 82.37 pence per euro.

Service Growth

In 2013, the economy grew 1.9 percent, the fastest since 2007, the ONS said. GDP in the fourth quarter was 1.3 percent below its pre-recession peak in the first quarter of 2008. Services output is 1.3 percent above its peak, while production, manufacturing and construction are on average about 10 percent lower.

The U.K. economy expanded 2.8 percent in the fourth quarter from a year earlier, the fastest growth since the first quarter of 2008.

“The economy does seem to be improving more consistently,” said Joe Grice, chief economic adviser to the ONS. “Today’s estimate suggests over four-fifths of the fall in GDP during the recession has been recovered.”

Services, the largest part of the economy, expanded 0.8 percent from the third quarter, when it grew at the same pace. Within the sector, recruitment activity helped businesses services and finance advance 1.2 percent, contributing 0.4 percentage point to economic growth.

‘Biggest Risk’

Manufacturing grew 0.9 percent, and total industrial output expanded 0.7 percent. Construction fell 0.3 percent as a result of a drop in output in November, the ONS said.

“The services sector remained the main driver of the recovery,” Blerina Uruci, an economist at Barclays Plc, wrote in a note to clients. “Although construction is a small part of the economy, the slowdown in output raises concerns whether the recent revival of the housing market will lead to a sustained increase in housing construction and supply.”

There are risks to the sustainability of the U.K.’s expansion, Standard & Poor’s, which ranks the nation’s debt AAA with a negative outlook, said today.

“The largest contributor to the U.K.’s recovery has come from private consumption, fueled by declining household savings rather than rising real wages or productivity,” analysts led by Moritz Kraemer, chief sovereign ratings officer at S&P, said in an e-mailed note. “Missing from the recovery to date has been a broader pickup in fixed non-residential investment.”

Budget Deficit

Chancellor of the Exchequer George Osborne said the GDP figures underscored the need to persist with his plan to eliminate the budget deficit.

“It is more evidence that our long-term economic plan is working,” he said in a statement. “But the job is not done, and it is clear that the biggest risk now to the recovery would be abandoning the plan that’s delivering jobs and a brighter economic future.”

Britain is the first Group of Seven nation to report a full GDP report for the final three months of 2013. German officials estimate their economy grew by a quarter of a percent in the period and 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, a survey of economists shows.

New Forecasts

The International Monetary Fund predicts U.K. growth of 2.4 percent this year and 2.2 percent in 2015, the Washington-based lender said this month, as it revised up a prediction it made in October. The BOE’s Monetary Policy Committee announces its interest-rate decision on Feb. 6. Less than a week later, Carney will present new forecasts at a press conference that may also prove an opportunity to explain what the next phase of his forward guidance might look like.

Under guidance, announced in August, the BOE pledged to keep the benchmark rate at a record-low 0.5 percent at least until unemployment falls to 7 percent. Unemployment slid to 7.1 percent in the three months through November, pushing it close to the threshold for reconsidering policy and prompting Citigroup Inc. to predict the policy makers will increase the key rate in the fourth quarter of this year.

The GDP figures also come with just over a year to go before the next general election. Since Prime Minister David Cameron took office in May 2010, the economy has grown by more than 4 percent.

Today’s first estimate of fourth-quarter growth is based on less than half of total data that will inform the final reading, the ONS said.

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