Bloomberg News

U.K. Second-Quarter Slump Smaller Than First Estimated: Economy

August 24, 2012

Bank Of England Governor Mervyn King

Bank of England policy makers cut their growth forecasts this month and left the door open to more stimulus if needed, with Governor Mervyn King saying they will do all they can to spur growth. Photographer: Chris Ratcliffe/Bloomberg

The U.K. economy shrank less than initially estimated in the second quarter after construction and production output were revised to show a smaller slump.

Gross domestic product fell 0.5 percent, compared with an initial estimate of a 0.7 percent decline on July 25, the Office for National Statistics said today in London. The report also showed the impact of cooling export demand, with net trade cutting 1 percentage point from GDP, the most since 1998.

The revision may not change the broader view of the economy as it struggles to recover amid the government’s fiscal squeeze and the fallout from the euro-area debt crisis. Bank of England policy makers cut their growth forecasts this month and left the door open to more stimulus if needed, with Governor Mervyn King saying they will do all they can to spur growth.

“The big picture is that the economy has been roughly flat over the last couple of years and we expect it is unlikely to improve significantly during the rest of this year or 2013,” said Michael Saunders, an economist at Citigroup Inc. in London. “The economy faces powerful and persistent headwinds. With prolonged stagnation in prospect, we believe the economy needs more stimulus.”

The GDP decline matched the median forecast of 30 economists in a Bloomberg News survey. From a year earlier, the economy shrank 0.5 percent.

The pound fell for a second day against the dollar, slipping 0.1 percent to $1.5844 as of 12:05 p.m. in London. The FTSE 100 Index declined 0.3 percent and the Stoxx Europe 600 Index (SXXP) was down 0.2 percent and was headed for its first weekly fall since June, before meetings between German, French and Greek leaders to discuss Greece’s second bailout program.

Revisions

U.K. construction output dropped 3.9 percent in the second quarter, less than the 5.2 percent initially estimated, while production declined 0.9 percent compared with 1.3 percent, the statistics office said. Services, the largest part of the economy, were unrevised at a 0.1 percent decline. Changes in inventories added 1.2 percentage points to GDP.

Consumer spending fell 0.4 percent and government spending was unchanged, according to the report. Gross fixed capital formation fell 3.2 percent, exports dropped 1.7 percent and imports rose 1.4 percent.

A separate U.K. report showed business investment fell 1.5 percent in the quarter from the previous three months and was up 1.7 percent from a year earlier. An index of services dropped 1.7 percent in June from May.

“Private domestic demand is thus performing particularly poorly and the euro crisis is taking its toll,” said George Buckley, an economist at Deutsche Bank AG in London. “Only stocks stepped into the breach to prevent a sharper fall, which does not bode well for future output.”

‘Challenging’ Europe

Diageo Plc (DGE), the world’s biggest distiller, said yesterday that Europe’s economy “remains very uneven.” Chief Financial Officer Deirdre Mahlan said that the region is “very challenging.”

Chancellor Angela Merkel said late yesterday that Germany and France will keep pressure on Greece to overhaul its economy when she meets today with Prime Minister Antonis Samaras. Merkel is trying to prevent an escalation of Europe’s debt turmoil after international monitors report on Greece’s finances.

Erratic Factors

The Bank of England has said that “erratic factors” such as an extra public holiday for the queen’s Diamond Jubilee in June exaggerated the weakness in second-quarter GDP and growth would have been 0.5 percentage points higher excluding them.

Recent reports suggest the economy’s weakness has continued into the current quarter, with an index of manufacturing falling to the weakest level in three years in July. Services grew at the slowest pace in 19 months.

The Bank of England is currently in the middle of a 50 billion-pound ($79 billion) round of stimulus that’s scheduled to run until November. Policy maker Martin Weale said in an interview published today in The Herald newspaper that he doesn’t see a need right now to add to bond purchases.

If stimulus is needed, he said he may favor an interest- rate cut over more quantitative easing if it could be achieved “without finding some banks got themselves into a position where they had to reduce lending because of the effects.”

Global Stimulus

Separately, Reserve Bank of Australia Governor Glenn Stevens said today that policy makers are prepared to respond in the event of a slowdown. He said he’s cautiously optimistic about the global outlook and that Australian policy makers are “well equipped” to manage any turmoil. He cited several favorable domestic signals including low unemployment, top-rated government debt, tame inflation and a strong banking system.

The RBA’s central outlook is for growth “close to trend” and inflation within a 2 percent to 3 percent target range, and the central bank is “prepared to respond to significant deviations,” he said.

In the U.S., a Commerce Department report at 8:30 a.m. in Washington may show that orders for durable goods rose 2.5 percent in July, the most this year, after a 1.3 percent increase the previous month, according to the median forecast of 75 economists in a Bloomberg News survey.

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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