Bloomberg News

U.K. Economy Shrank in Fourth Quarter as Companies Scaled Back Investment

February 24, 2012

Mervyn King, governor of the Bank of England, pauses during the bank's quarterly inflation report news conference at the Bank of England in London. Photographer: Simon Dawson/Bloomberg

Mervyn King, governor of the Bank of England, pauses during the bank's quarterly inflation report news conference at the Bank of England in London. Photographer: Simon Dawson/Bloomberg

The U.K. economy shrank in the fourth quarter as companies scaled back investment, underscoring the risks to a recovery that Bank of England Governor Mervyn King says will be “slow and uncertain.”

Gross domestic product dropped 0.2 percent from the third quarter, the same as previously estimated, the Office for National Statistics said in London today. Economist predicted no revision, according to the median of 36 forecasts in a Bloomberg survey. Business investment fell 5.6 percent, the most since the first quarter of 2011.

A 0.5 percent rise in consumer spending, the first increase for 1 1/2 years, fuelled optimism that Britain will avoid recession. Still, King said Feb. 15 the central bank is ready to expand stimulus further if needed to aid an economy facing “substantial headwinds.” Unemployment (UKUEILOR) is climbing, credit is tight and the government is pushing through the deepest budget cuts in British peacetime.

“We’re pretty certain to see a minor positive number in the first quarter and so are going to avoid a technical recession, but the basic story is one of essentially zero growth through to the summer,” said Brian Hilliard, an economist at Societe Generale SA in London and a former Bank of England official. “We do need to see a turnaround in investment before we can start to turn a little more optimistic.”

The pound gained against the dollar, buoyed by the bigger- than-forecast increase in consumer spending, and was trading at $1.5816 as of 11:36 a.m. in London, up 0.5 percent on the day. The yield on the 10-year gilt dropped two basis points to 2.08 percent.

Optimism

Greece’s 130 billion-euro ($173 billion) rescue, agreed on by euro-area finance chiefs this week, has buoyed optimism that the debt crisis gripping Britain’s biggest export market has been tamed for now.

German gross domestic product fell 0.2 percent in the fourth quarter as the sovereign debt crisis damped demand across the euro region and curtailed exports from Europe’s largest economy, the Federal Statistics Office in Wiesbaden said today, confirming an initial estimate published on Feb. 15. France’s economy grew 0.2 percent during the period, helping to limit the euro-area economy’s contraction to 0.3 percent.

U.K. purchasing management indexes of manufacturing and services rose in January. Most Bank of England officials argued this month that “growth might be stronger than expected in the near term,” minutes of their Feb. 8-9 policy meeting showed. The FTSE 100 index has gained almost 7 percent this year.

Business Investment

The fall in business investment wiped 0.5 percentage point from GDP in the fourth quarter. Its impact was mitigated by consumer spending, which added 0.3 points in a sign that households are starting to see their finances improve after ther biggest squeeze on incomes since at least the 1970s. Exports gained 2.3 percent and net trade contributed 0.6 point to GDP. Companies added stocks at a quarter of the pace of the previous three months, wiping 0.5 point, the statistics office said.

From a year earlier, GDP rose 0.7 percent in the fourth quarter instead of the 0.8 percent estimated last month. Services -- the largest part of the economy -- were unchanged over the quarter. In December alone, they grew 0.2 percent from the previous month. Industrial production fell 1.4 percent in the fourth quarter from the third, with manufacturing shrinking 0.8 percent. Construction industries contracted by 0.5 percent.

With the government constrained by its pledge to all but eradicate a budget deficit of 9 percent of GDP, the onus for spurring growth remains on the Bank of England. Policy makers voted to expand their bond-buying program by 50 billion pounds to 325 billion pounds this month, with two arguing for a larger increase.

Weak Recovery

The economy has recovered barely a half of the 7 percent of output lost during the 2008-2009 recession -- only Japan and Italy are further behind among Group of Seven nations -- and unemployment is at a 16-year high of 8.4 percent and rising. In current prices, the compensation of employees fell 0.3 percent in the fourth quarter.

Prime Minister David Cameron says the warning from Moody’s Investors Service that Britain could lose its top credit rating reinforces the need to stick to his 150 billion-pound budget- cutting program, which will see 700,000 government jobs axed by 2017.

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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