U.K. GDP Growth Slowed in Second Quarter as Momentum Weakens
August 26, 2011, 7:18 AM EDTBy Jennifer Ryan
(Updates with government, opposition comment starting in 18th paragraph.)
Aug. 26 (Bloomberg) -- U.K. economic growth slowed in the second quarter as manufacturing shrank and services showed signs of losing momentum, adding pressure on Prime Minister David Cameron to ease the squeeze on consumers.
Gross domestic product rose 0.2 percent from the first quarter, the same as estimated a month ago, the Office for National Statistics said today in London. Output rose 0.7 percent from a year earlier. A separate report showed services fell 0.1 percent in June, the final month of the quarter.
The economy has barely expanded since September as government budget cuts and accelerating inflation sap consumer confidence. Cameron is under mounting pressure to find ways to spur growth as the euro-region debt crisis and global market turmoil threaten the biggest markets for British goods.
“There’s a bit of relief that it wasn’t revised down, but it’s still looking set to be a very difficult second half,” said Philip Shaw, an economist at Investec Securities in London. “From a global perspective, the backdrop for the U.K. is very uncomfortable.”
The pound was trading at $1.6333 as of 11:40 a.m. in London, up 0.2 percent on the day.
Revisions
In its second estimate of GDP, the statistics office normally includes provisional data on income and expenditure, including consumer and government spending, business investment and exports. These were not published today because the ONS is revising its procedure for preparing the national accounts. The figures will be released, along with the revised Blue Book, on Oct. 5.
Small downward revisions to industrial production were offset by an upward revision to services, the biggest part of the economy.
Services output grew 0.5 percent in the second quarter from the first, boosted by transport and business services and finance. The construction industry expanded 0.5 percent.
Manufacturing shrank 0.5 percent and total industrial production, which includes mining and utilities’ output, dropped 1.6 percent, the biggest contraction since the first quarter of 2009.
Industrial output was partly hit by warm weather in April that depressed demand for fuel, while maintenance shutdowns saw mining output fall at its fastest pace since 2006.
Special Factors
Other special factors included the extra public holiday to mark the royal wedding in April and supply disruptions stemming from the Japanese earthquake. GDP would have been about 0.5 percent higher in the absence of these events, the statistics office said. The economy grew 0.5 percent in the first quarter.
Recent data suggest the pace of underlying activity is weakening, with jobless claims rising the most in more than two years in July. An index of retail sales in August fell to its lowest level since the Conservative-led coalition took office in May 2010 and consumer confidence declined for a second month in July, reports showed yesterday.
Debt woes in countries such as Italy and Greece, and the U.S. federal deficit are among the “storm clouds everywhere” threatening ad spending, Martin Sorrell, chief executive officer of London-based advertising company WPP Plc, said on Aug. 24.
The Bank of England kept its benchmark rate at a record low of 0.5 percent this month and officials discussed whether they needed to resume buying assets to spur growth.
‘Severe Stress’
The risk of “severe stress and dislocation in financial markets” stemming from the market strains would “have a significant impact on the U.K. economy,” Bank of England Governor Mervyn King said Aug. 16.
The bank forecasts the economy will grow about 1.5 percent this year and 2.2 percent next year, less than its projections in May for 1.9 percent and 2.5 percent.
Growth in Germany, the largest European economy, slowed to just 0.1 percent in the second quarter from 1.3 percent in the first and in France the economy stalled. Consumer spending is weakening in the U.S., which was stripped of its top credit rating by Standard & Poor’s earlier this month.
Cameron has staked his reputation on carrying out his plans to eradicate the bulk of the fiscal deficit by 2015. The 80 billion-pound ($131 billion) program of spending cuts will lead to the loss of more than 300,000 government-funded jobs. The government said today global market instability underlines the need to stick to the program.
“Jobs are being created and the credibility bought by the government’s deficit-reduction plan has made Britain a safe haven in the sovereign-debt storm,” the Treasury said in a statement.
The opposition Labour Party renewed its call for an emergency cut in sales tax, saying Cameron’s government had brought the economy to a virtual standstill by trying to reduce the deficit too quickly.
Britain is “dangerously exposed” if market conditions in the euro region and the U.S. deteriorate, Angela Eagle, who speaks on Treasury affairs for Labour, said in a statement.
--With assistance from Thomas Penny in London. Editors: Andrew Atkinson, Craig Stirling
To contact the reporter on this story: Jennifer Ryan in London at jryan13@bloomberg.net
To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net
