Bloomberg News

U.K. Economy Expanded 0.5% in First Quarter, Led by Exports

June 28, 2011

(Updates with economist comment in fourth paragraph, Bank of England chief economist in seventh, pound in eighth.)

June 28 (Bloomberg) -- Exports returned the British economy to growth in the first quarter as soaring food and energy costs eroded household incomes and curbed consumer spending.

Gross domestic product rose 0.5 percent from the fourth quarter, the same as previously estimated, the Office for National Statistics said today in London. The pace of growth from a year earlier was revised to 1.6 percent from 1.8 percent.

Concern about economic growth is taking precedence over inflation as rising prices and government budget cuts put Britain on course for the biggest squeeze on living standards since the 1970s. The Bank of England kept its key interest rate at a record low this month and some officials said more bond purchases may be needed if weakness persists.

“With this brutal squeeze on incomes, it is no great wonder that consumer spending is weak and so many retailers are struggling,” said Michael Saunders, Citigroup Inc.’s London- based chief European economist. “Unlike the early 80s and early 90s recessions, household real disposable incomes did not fall in the recent recession -- but that squeeze was merely deferred and is clearly evident now.”

The expansion in GDP followed a 0.5 percent drop in the fourth quarter and left output no higher than it was between July and September last year.

Real incomes fell by 0.8 percent following a 0.9 percent drop in the fourth quarter and consumer spending declined 0.6 percent, the largest drop since the second quarter of 2009. Spending on clothing and footwear posted the biggest fall.

‘Fragile’ Recovery

Business investment fell 3.2 percent, the most since the third quarter of 2009, and construction plunged 3.4 percent, the largest decrease since the first quarter of that year.

“The economic recovery in the U.K. remains fragile,” Bank of England Chief Economist Spencer Dale said in evidence to lawmakers in London today. “In particular, the continuing squeeze on households’ purchasing power means there is a risk that consumer spending may weaken further.”

The pound extended its decline against the dollar and was trading at $1.5923 as of 11:18 a.m. in London, down 0.4 percent from yesterday. Bonds declined, pushing up the yield on the 10- year gilt by 3 basis points to 3.19 percent.

The economy expanded in the first quarter largely thanks to a 2.4 percent rise in exports, giving a boost to government hopes of rebalancing the economy away from spending and financial services. The pound’s depreciation since early 2007 is giving a competitive edge to British goods and net trade added 1.4 percentage points to growth, the most since 1979.

Incomes Squeeze

Manufacturing output grew 0.7 percent from the fourth quarter and services, the largest part of the economy, increased 0.9 percent. The annual rate of GDP growth was lower than previously estimated because of downward revisions to output in the third quarter of 2010, the statistics office said.

The squeeze on household budgets is weighing on an economy that has recouped barely more than a third of the output lost during the recession, leaving Britain lagging behind recoveries in the U.S., Germany and France. The International Monetary Fund lowered its 2011 U.K. growth forecast this month to 1.5 percent from 1.7 percent in April.

Real incomes fell last year for the first time since 1981 and the U.K. Treasury predicts a further drop this year, marking the first back-to-back decline since the 1970s oil crisis and recession.

Savings Ratio

J Sainsbury Plc, the U.K.’s third-largest supermarket chain, said on June 15 that more customers are switching to its own brands to save money as household incomes shrink.

Household savings stood at 4.6 percent of disposable income in the first quarter, down from 5.1 percent in the fourth quarter, suggesting the squeeze on incomes is forcing consumers to dip into money set aside.

Separately, the statistics office said the current-account deficit narrowed to 9.4 billion pounds ($15 billion) in the first quarter from 13 billion pounds in the previous three months. As a percentage of GDP, the deficit fell to 2.5 percent from 3.5 percent. The deficit on trade in goods narrowed to 22.2 billion pounds.

--With assistance from Scott Hamilton in London. Editors: Andrew Atkinson, Fergal O’Brien

To contact the reporter on this story: Svenja O’Donnell in London at sodonnell@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net


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