U.K. Economic Growth Stagnated in Second Quarter (Update2)
By Jennifer Ryan
Aug. 22 (Bloomberg) -- The U.K. economy stagnated unexpectedly in the second quarter, ending the nation's longest stretch of economic growth in more than a century.
Gross domestic product was unchanged from the previous quarter, the Office for National Statistics said, compared with a previous estimate for growth of 0.2 percent. Economists had expected a 0.1 percent expansion, according to the median estimate of 34 economists. Growth was 1.4 percent from a year earlier, the weakest since 1992.
The report adds pressure on the Bank of England to set aside inflation concerns and cut interest rates. It also worsens Prime Minister Gordon Brown's struggle to salvage his reputation for economic competence. The pound fell as much as 1 percent against the dollar and weakened against the euro.
``There is still worse to come,'' Ross Walker, an economist at Royal Bank of Scotland Group Plc in London, said in a Bloomberg Television interview. ``We may have to wait until early 2009 before we get the first rate cut because the inflation situation still looks pretty forbidding.''
Europe's second-largest economy emerged from its last recession in 1991 and then shrank for a single quarter in the three months ending in June 1992. Britain's pace of expansion from a year ago compares with 1 percent in Japan, 1.8 percent in the U.S., and 1.5 percent in the nations using the euro.
Blow for Brown
Today's report is a blow to Brown, who is battling to revive his government's popularity with voters and quell talk of challenges to his authority from within the ruling Labour Party. He said on Aug. 20 that the government will announce measures to revive the economy next month.
The economy faltered after banks choked off credit following the collapse of the subprime mortgage market in the U.S. Goldman Sachs Group Inc. economists said yesterday tighter credit markets will push half of the world economy into a recession.
``The bank needs to prevent a fairly shallow recession from getting worse,'' said Stewart Robertson, an economist at Morley Fund Management in London, said before the report was published. ``They need to cut rates this year.''
The U.K. currency fell as low as $1.8573 against the dollar after the report, down from a peak of more than $2.11 in November. Against the euro, the pound weakened 6 percent to 79.77 pence from 79.32 yesterday.
The implied rate on the December futures contract fell 2 basis points to 5.72 percent as of 10:45 a.m. in London. The contract settles to the three-month London interbank offered rate for the pound, which was set at 5.76 percent yesterday.
Consumer Contraction
Industrial production, which includes manufacturing as well as utilities and oil and gas extraction, has now contracted for two consecutive quarters. Construction also shrank. Service industries, which range from banks to airlines, grew at the slowest rate since 1995.
Business investment fell 5.3 percent, the biggest decline in 23 years. Household spending declined for the first time since 2005, falling 0.1 percent.
Banks worldwide have shed more than 100,000 jobs and suffered more than $500 billion in writedowns and credit losses after the collapse of the subprime mortgage market in the U.S. last year. A report yesterday by recruitment firm Morgan McKinley showed London job openings in the financial-services industry fell 16 percent in July from a year earlier.
Living Costs
While living costs are rising in Britain, the value of homes is plummeting as banks withhold funding for mortgages. Residential property prices fell 8.8 percent in July from a year earlier, the most in at least a quarter century, mortgage lender HBOS Plc said on Aug. 7.
The bank's inflation forecasts show the consumer price index will fall below the 2 percent target in two years if interest rates remain unchanged. The nine members of the central bank's Monetary Policy Committee split three ways on how to steer interest rates this month, minutes of the meeting showed.
David Blanchflower voted for a quarter point cut while Timothy Besley wanted an increase of the same amount. The majority of the committee including King opted for no change.
The simultaneous risks to inflation and growth mean that the bank is preparing to cut rates but will wait to do so until next year, said George Buckley, an economist at Deutsche Bank AG in London.
Yesterday, he said he now expects four quarter-point rate reductions next year, starting in February. Previously he was counting on two.
``The bank signaled that inflation is going to stay high for quite some time,'' he said. ``They might want to see evidence that it has come down or is peaking before they opt for a rate cut.''
To contact the reporter on this story: Jennifer Ryan in London at [email protected]
Last Updated: August 22, 2008 06:07 EDT
By Jennifer Ryan
Aug. 22 (Bloomberg) -- The U.K. economy stagnated unexpectedly in the second quarter, ending the nation's longest stretch of economic growth in more than a century.
Gross domestic product was unchanged from the previous quarter, the Office for National Statistics said, compared with a previous estimate for growth of 0.2 percent. Economists had expected a 0.1 percent expansion, according to the median estimate of 34 economists. Growth was 1.4 percent from a year earlier, the weakest since 1992.
The report adds pressure on the Bank of England to set aside inflation concerns and cut interest rates. It also worsens Prime Minister Gordon Brown's struggle to salvage his reputation for economic competence. The pound fell as much as 1 percent against the dollar and weakened against the euro.
``There is still worse to come,'' Ross Walker, an economist at Royal Bank of Scotland Group Plc in London, said in a Bloomberg Television interview. ``We may have to wait until early 2009 before we get the first rate cut because the inflation situation still looks pretty forbidding.''
Europe's second-largest economy emerged from its last recession in 1991 and then shrank for a single quarter in the three months ending in June 1992. Britain's pace of expansion from a year ago compares with 1 percent in Japan, 1.8 percent in the U.S., and 1.5 percent in the nations using the euro.
Blow for Brown
Today's report is a blow to Brown, who is battling to revive his government's popularity with voters and quell talk of challenges to his authority from within the ruling Labour Party. He said on Aug. 20 that the government will announce measures to revive the economy next month.
The economy faltered after banks choked off credit following the collapse of the subprime mortgage market in the U.S. Goldman Sachs Group Inc. economists said yesterday tighter credit markets will push half of the world economy into a recession.
``The bank needs to prevent a fairly shallow recession from getting worse,'' said Stewart Robertson, an economist at Morley Fund Management in London, said before the report was published. ``They need to cut rates this year.''
The U.K. currency fell as low as $1.8573 against the dollar after the report, down from a peak of more than $2.11 in November. Against the euro, the pound weakened 6 percent to 79.77 pence from 79.32 yesterday.
The implied rate on the December futures contract fell 2 basis points to 5.72 percent as of 10:45 a.m. in London. The contract settles to the three-month London interbank offered rate for the pound, which was set at 5.76 percent yesterday.
Consumer Contraction
Industrial production, which includes manufacturing as well as utilities and oil and gas extraction, has now contracted for two consecutive quarters. Construction also shrank. Service industries, which range from banks to airlines, grew at the slowest rate since 1995.
Business investment fell 5.3 percent, the biggest decline in 23 years. Household spending declined for the first time since 2005, falling 0.1 percent.
Banks worldwide have shed more than 100,000 jobs and suffered more than $500 billion in writedowns and credit losses after the collapse of the subprime mortgage market in the U.S. last year. A report yesterday by recruitment firm Morgan McKinley showed London job openings in the financial-services industry fell 16 percent in July from a year earlier.
Living Costs
While living costs are rising in Britain, the value of homes is plummeting as banks withhold funding for mortgages. Residential property prices fell 8.8 percent in July from a year earlier, the most in at least a quarter century, mortgage lender HBOS Plc said on Aug. 7.
The bank's inflation forecasts show the consumer price index will fall below the 2 percent target in two years if interest rates remain unchanged. The nine members of the central bank's Monetary Policy Committee split three ways on how to steer interest rates this month, minutes of the meeting showed.
David Blanchflower voted for a quarter point cut while Timothy Besley wanted an increase of the same amount. The majority of the committee including King opted for no change.
The simultaneous risks to inflation and growth mean that the bank is preparing to cut rates but will wait to do so until next year, said George Buckley, an economist at Deutsche Bank AG in London.
Yesterday, he said he now expects four quarter-point rate reductions next year, starting in February. Previously he was counting on two.
``The bank signaled that inflation is going to stay high for quite some time,'' he said. ``They might want to see evidence that it has come down or is peaking before they opt for a rate cut.''
To contact the reporter on this story: Jennifer Ryan in London at [email protected]
Last Updated: August 22, 2008 06:07 EDT
