Bloomberg News

U.K. Economic Slump May Be Deeper as Construction Revised

May 11, 2012

A pedestrian passes the Bank of England. Photographer: Simon Dawson/Bloomberg

A pedestrian passes the Bank of England. Photographer: Simon Dawson/Bloomberg

Britain’s economy may have shrunk more than previously estimated in the first quarter after the statistics office reported a deeper slump in construction.

Building output plunged 4.8 percent in the three months through March, the Office for National Statistics said today. That compares with a 3 percent drop in the first estimate of gross domestic product on April 25, which showed the economy contracted 0.2 percent. The revision on its own would shave 0.1 percentage point off GDP, the statistics office said.

The building data may add to concerns about the economy as the Bank of England grapples with a double-dip recession and inflation remains above its target. Policy makers hadn’t seen the revision before they decided yesterday to halt their quantitative-easing program at 325 billion pounds ($524 billion), according to statistics office officials.

“Today’s figures will intensify the dilemma facing the Monetary Policy Committee,” said Samuel Tombs, an economist at Capital Economics Ltd. in London. Policy makers have to balance “sticky inflation and very weak economic activity,” he said.

The pound remained weaker against the dollar and the euro after the data was published. It traded at $1.6103 as of 11:30 a.m., down 0.3 percent on the day.

Revision Impact

The quarterly drop in construction, which accounts for 8 percent of GDP, was the biggest in three years. From a year earlier, building output was down 3.7 percent.

Based on the initial estimate, construction reduced first- quarter GDP by about 0.2 percentage point. That’s now been revised to “just over” 0.3 point, officials said, indicating the economy would have been flat without the construction impact.

The European Commission said today that recent business surveys had indicated that the GDP estimate may get revised up. Howard Archer, an economist at IHS Global Insight in London, said today’s data are “at odds” with surveys and “dilutes hopes that the first quarter GDP contraction will eventually be revised away.”

Still, Alan Clarke at Scotia Capital said it’s “reasonable” to think that first-quarter services will be revised up, which would counter the construction revision and put GDP “back where we started.” The second estimate of the first-quarter GDP will be published on May 24.

Inflation Concerns

The Bank of England announced yesterday that it will leave its bond-purchase target unchanged after seven months of pumping money into the economy. It also kept its benchmark interest rate at a record-low 0.5 percent.

Some policy makers have signaled increased concerns that inflation won’t slow as much this year as previously projected.

Data today showed factory-output prices increased 0.7 percent in April from March, exceeding the 0.4 percent median forecast of 19 economists in a Bloomberg News survey. From a year earlier, prices were up 3.3 percent, also faster than forecast. Input prices fell 1.5 percent from March and were up 1.2 percent from a year earlier.

In the 10 categories of producer price, nine rose and one fell in April from the previous month, today’s report showed. The biggest gain was by computer, electrical and optical equipment, which rose 2.4 percent, followed by tobacco and alcohol, up 2.2 percent.

Core producer prices, which exclude costs of food, alcohol, tobacco and petroleum, increased 0.6 percent on the month in April and 2.3 percent from a year earlier.

While inflation concerns are elevated, economists at Deutsche Bank AG and BNP Paribas SA say Bank of England Governor Mervyn King may leave the door open to further stimulus next week.

The central bank’s Inflation Report on May 16 will probably lower U.K. growth forecasts, they said, giving policy makers leeway to restart QE. King will hold a press conference in London immediately after the report is published.

To contact the reporter on this story: Scott Hamilton in London at shamilton8@bloomberg.net

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


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