Consumers Keep U.K. Engine Running as Economic Growth Revised Up

Britain’s economy had more momentum than previously estimated in the first quarter, driven by consumer spending and corporate investment.

Gross domestic product rose 0.4 percent, the Office for National Statistics said in London on Tuesday, revising its previous figure of 0.3 percent. A separate report showed the current account deficit narrowed to 26.5 billion pounds ($41.7 billion), or 5.8 percent of GDP.

The economy has grown for nine straight quarters as a bout of very low inflation spurred domestic demand, though the recovery remains uneven with net trade continuing to act as a drag. As Greece’s debt crisis casts a pall over Europe, Chancellor of the Exchequer George Osborne said that the potential impact of a Greek exit from the euro area shouldn’t be underestimated.

“Growth is posting a very respectable pace of expansion,” said Alan Clarke, an economist at Scotiabank in London. “The flipside is that inflation at close to zero is a massive presentational hurdle to a rate hike and the Greek crisis is probably also holding back monetary policy makers.”

The Bank of England has previously issued a warning about the current-account gap, saying in April that it could, “in adverse circumstances, trigger a deterioration in market sentiment.” The deficit amounted to 5.9 percent of GDP last year, the most since records began in 1948, and economists warned that the first-quarter figure remained too high for comfort.

Trade Balance

While the trade balance worsened, there were improvements in the balances on income. Revisions left the current-account deficit at 6.4 percent of GDP in the fourth quarter and a peak of 7.1 percent in the previous three months.

Consumer spending rose 0.9 percent in the three months through March and business investment grew 2 percent, both faster than previously estimated. Exports rose 0.4 percent and imports increased 2.3 percent. Net trade subtracted 0.6 percentage point from growth.

The upward revision to GDP was largely due to methodological changes in construction. Services, the largest part of the economy, grew an unrevised 0.4 percent.

Economists predict growth picked up this quarter, and an index of consumer confidence published Tuesday rose to its highest level in more than 15 years this month. With wage growth accelerating, two BOE policy makers have argued in recent months that the decision to maintain the benchmark interest rate at a record-low 0.5 percent is “finely balanced.”

Still, investors are betting higher borrowing costs remain some way off. Sonia forward contracts aren’t fully pricing a quarter-point rate increase until May next year.

The saving ratio, the amount of disposable income households set aside rather than spend, fell to 4.9 percent in the first quarter, the lowest since 2008, from 5.9 percent. Real household disposable income rose at the fastest annual pace since 2001.