U.K. Growth Slows as Services Slump to 12-Year Low
The U.K. economy grew less than previously estimated in the first quarter, dragged down by the weakest services expansion in 12 years.
Gross domestic product rose 0.3 percent in the three months through March, the least in three years, the Office for National Statistics said in London today. The result was lower than the 0.4 percent reported on May 23, which was the median forecast of 32 economists in a Bloomberg News survey. From a year earlier, the economy expanded 2.3 percent.
Falling house prices, stumbling consumer confidence and a contraction in services from banks to airlines have already hurt the popularity of Gordon Brown, who marks his first year as prime minister today. Bank of England Governor Mervyn King said yesterday that economic growth must ease to contain inflation, stoked by record oil prices.
“There are clearly signs that growth will slow sharply,'' said Amit Kara, an economist at UBS AG in London who formerly worked for the Bank of England. “The second quarter will be even weaker. Household spending is holding up but it's just a matter of time before that cracks.''
Financial institutions worldwide have lost or written down $400 billion following the collapse of the U.S. subprime mortgage market. Shareholders of HBOS Plc, the U.K.'s biggest mortgage lender, yesterday approved a 4 billion-pound ($7.8 billion) rights offer to raise funds. Barclays Plc and Bradford & Bingley are also turning to investors to replenish their balance sheets.
Stock Losses
The U.K.'s benchmark FTSE 100 stock index has dropped 15 percent this year, and was little changed today at 5,510.20 as of 10:44 a.m. in London.
Confidence among European executives and consumers dropped more than economists forecast this month, and European retail sales plunged in June, reports showed today. French gross domestic product rebounded less than initially estimated in the first quarter, the French statistics office said.
Services increased 0.3 percent in the quarter, the least since the final three months of 1995. Gross fixed capital formation fell, led by a 3.9 percent drop in dwellings, the biggest decline since 2000.
King said on May 14 that the country may experience the “odd quarter or two'' of contraction. The bank predicted that the annual rate of economic expansion will drop to around 1 percent early next year, the lowest since 1992.
Consumer Spending
Household spending, which drove the fastest expansion in three years in 2007, is set to slow, King said easy payday loan. Higher fuel prices and the dearth of credit pushed consumer confidence to the lowest level since Margaret Thatcher was ousted from office in 1990, GfK NOP Ltd. said May 30.
Still, household spending rose 1.1 percent in the quarter, the most since the end of 2006. Retail sales unexpectedly rose the most in two decades in May, the statistics office said.
“If growth doesn't slow enough, the Bank of England will engineer what's required,'' said Matthew Sharratt, an economist at Bank of America Corp. in London. “We'll see a sharp cut in disposable incomes because of oil prices. Growth could stall.''
Consumers may have financed spending by digging into savings. The savings ratio dropped to 1.1 percent in the first three months of the year, the lowest since the final quarter of 1959. Real disposable incomes fell by 1 percent in the quarter, the weakest since 1999, the statistics office said.
Interest-Rate Vote
Central bank policy makers voted 8-1 to keep the benchmark interest rate at 5 percent in June, with David Blanchflower in favor of a reduction. Four other policy makers said yesterday they considered an increase because of concerns about inflation.
Consumer prices jumped 3.3 percent in May from a year earlier, the most in more than a decade, and King said yesterday the rate may exceed 4 percent later this year. The bank aims to keep the inflation rate at 2 percent.
“The economic slowdown will need to be sufficient to ensure that inflation does not persist above the target,'' King said yesterday. “But at the same time, we need to avoid a slowdown that is so pronounced that it would pull inflation down, not just to the target, but below.''
House prices declined by the most this year in June as buyers shunned the market, Rightmove Plc said this week. Services contracted for the first time in five years, a report by the Charted Institute of Purchasing and Supply showed June 4.
The 12 percent decline of the pound against a basket of trading partners may help manufacturers weather the slowdown. Exports rose 0.6 percent in the first three months of the year.
The current account deficit shrank to 8.4 billion pounds ($16.5 billion), the least in almost three years, driven by 7.9 billion pounds in banking losses from overseas companies, the statistics office said in a separate report today.