Tags: UK | Growth | Slows | Low | Rates

UK Growth Slows to 0.2%, Reinforcing Case for Low Rates

Tuesday, 26 Jul 2011 09:51 AM

The U.K. economy barely grew in the second quarter, suggesting the Bank of England will continue to keep rates at a record low to boost a flagging recovery.

Gross domestic product rose 0.2 percent from the first quarter, when it increased 0.5 percent, the Office for National Statistics said today. That matched the median forecast of 32 economists in a Bloomberg News survey. Production decreased 1.4 percent. Excluding factors such as the Japanese earthquake, the Royal Wedding and warm weather in April, the economy could have grown as much as 0.7 percent, the statistics office estimates. The pound jumped against the dollar after the report.

Prime Minister David Cameron’s spokesman said yesterday that 2011 was “going to be a tough year.” Consumers are spending less as the government’s fiscal squeeze undermines confidence and inflation erodes incomes at the fastest pace since the 1970s. Bank of England officials said this month the economic weakness may persist “for longer than previously thought.”

“The worrying thing is that we’re looking at broad based weakness,” Hetal Mehta, an economist at Daiwa Capital Markets Europe Ltd. in London, said before the report was published. “It does seem that even manufacturing which has been performing relatively well has taken a dive. There will be some uncertainty and volatility around the extra public holiday.”

The pound surged as much as 0.5 percent against the dollar after the report. It traded at $1.6393 as of 9:33 a.m. in London, up 0.7 percent since yesterday.

Weather Impact

From a year earlier, the economy expanded 0.7 percent, the least since the first quarter of 2010.

Within production, manufacturing decreased 0.3 percent, mining and quarrying fell 6.5 percent and utilities dropped 3.2 percent. The statistics office said energy output may have been reduced due to warm weather in April.

Services made the biggest contribution to growth in the quarter, according to the statistics office. They rose 0.5 percent, with hotels and restaurants recording a 2.2 percent increase. The ONS said there is “some evidence” that the additional public holiday for the Royal Wedding boosted the industry.

Seven of the Bank of England’s nine-member Monetary Policy Committee, led by Governor Mervyn King, voted to keep the benchmark interest rate unchanged at 0.5 percent this month, saying that recent developments “reduced the likelihood that a tightening in policy would be warranted in the near term.” One official wanted more stimulus and two favored a rate increase.

“The case for a rate hike in the next year isn’t strong,” Mehta said.

Fiscal Squeeze

Investors have pushed back bets on the first increase to beyond June 2012, data from Tullett Prebon Plc on forward contracts for the sterling overnight interbank average show. The benchmark has been at 0.5 percent since March 2009.

The slowdown in growth may add to criticism of Cameron’s fiscal squeeze, the biggest since World War II. While Cameron and Chancellor of the Exchequer George Osborne say the cuts are necessary to reduce the budget deficit, the opposition Labour party has said they are too severe.

“I want to get the deficit down, but not this fast,” Labour’s Treasury affairs spokesman Ed Balls said on BBC Television last week. “It’s dangerous and reckless. We’re heading into a vicious circle.”

‘Cautious’

Wolfson Microelectronics Plc, an Edinburgh-based maker of audio chips for smartphones, televisions and tablet computers, forecast yesterday that second-half revenue will be “flat” compared with a year earlier as consumer demand slows.

“Our customers are being very cautious and waiting to see how things pan out,” Chief Executive Officer Mike Hickey said on a conference call as the company lowered its 2011 revenue- growth forecast to less than 10 percent.

While the U.K. economy is struggling to pick up, price growth continues to exceed the Bank of England’s 2 percent target. Inflation was 4.2 percent in June, and the central bank said last week that it was “likely” that it would exceed 5 percent in the coming months. The peak may be “a little higher and come sooner than the committee had previously expected,” officials said.

In a separate report, the statistics office said services industries, which account for about three quarters of the economy, rose 1.6 percent in May from the previous month and were up 1.4 percent on the year. On a three-month basis, services increased 1.2 percent from the previous quarter.

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The U.K. economy barely grew in the second quarter, suggesting the Bank of England will continue to keep rates at a record low to boost a flagging recovery. Gross domestic product rose 0.2 percent from the first quarter, when it increased 0.5 percent, the Office for...
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Tuesday, 26 Jul 2011 09:51 AM
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