UK economy grows the least since 2005 on investment

May 24, 2008

LONDON (Bloomberg) -- The UK economy grew at the slowest pace since 2005 in the first quarter after higher credit costs hurt construction and business services slowed.

Gross domestic product rose 0.4 percent in the three months through March, the Office for National Statistics said in London on Friday. The result matched the agency’s original estimate and the median forecast of 31 economists in a Bloomberg News survey. Business services including accountancy and advertising expanded at the weakest pace since 2003.
“Firms have cut back on investment sharply, and that’s only natural when you have the biggest financial shock since the Great Depression,” said Dominic White, an economist at ABN Amro Holding NV in London and a former UK Treasury official. “We’re looking at a weak picture, and the odds of a negative second quarter are fairly high.”
The Bank of England is trying to steer an economy threatened by slowing growth and faster gains in consumer prices. While inflation jumped the most since 2002 last month, optimism among UK households fell to the lowest in more than 15 years and billionaire investor George Soros said this week the UK may fall into a recession.
The pound was little changed after the release and traded at $1.9812 at 12:08 p.m. in London on Friday. Against the euro, it traded at 79.45 pence.
-----------------Political fortunes
Slowing growth will make it harder for Prime Minister Gordon Brown to revive the fortunes of his Labor Party, which yesterday lost a by-election in Crewe and Nantwich in northern England. That was the opposition Conservative Party’s first such victory in more than quarter of a century.
“People are worried after 10 years standards of living rising, we have a problem with rising food prices,” Brown told reporters yesterday in London. “They want us to address these challenges and I believe that I can do so.”
Investment dropped 1.6 percent in the first quarter from the previous three month after economists in a Bloomberg survey forecast a gain of 0.2 percent. The business services and finance category grew 0.4 percent and consumer spending rose 1.3 percent on the quarter, the statistics office said.
GDP growth slowed from 0.6 percent in the fourth quarter, and expanded 2.5 percent from a year earlier.
---------------------Recession risk
Friday’s report adds to evidence the slowdown in the economy is worsening and may spread to consumer spending in coming months. Bank of England Governor Mervyn King said last week that Britain may have “an odd quarter or two of negative growth.” Consumer confidence fell to the lowest in more than 15 years in April, GfK NOP Ltd said April 30, and unemployment rose for a third month.
The central bank expects “quite a significant slowdown,” Bank of England policy maker Andrew Sentance said in a radio interview with a university radio station in Warwick, England.
British Land Co. Plc., the biggest developer in London, on May 20 reported its first annual loss in at least 20 years after writing down the value of office buildings and malls.
UK homebuilders will cut tens of thousands of jobs as the 19 billion-pound ($37 billion) industry grapples with the housing slump, Stewart Baseley, chairman of the Home Builders Federation, said in an interview this week.
“Business investment looks soft,” said James Shugg, an economist at Westpac Banking Corp. in London. “Growth should be pretty sluggish for the rest of the year.”
Growth in services industries was revised down to 0.5 percent in the quarter from an original estimate of 0.6 percent.
----------------Production
Overall industrial production, which includes oil and gas extraction and utilities, contracted 0.2 percent from the final three months of 2007, more than an April 25 estimate of 0.1 percent.
“The U.S. is slipping quickly into recession and I think this recession is on its way over the Atlantic,” said former Financial Services Authority Chairman Howard Davies in an interview on May 21.
Exports were unchanged and imports fell 0.6 percent, the statistics office said.
The Bank of England has cut the benchmark interest rates three times since December to 5 percent to kick-start the economy. Still, the nine-member Monetary Policy committee voted 8-1 to keep rates unchanged this month as concerns about faster consumer-price increases outweigh those about economic growth, minutes from the May 8 meeting showed May 21.
Inflation accelerated to 3 percent in April from 2.5 percent the month before. King said May 14 that inflation may exceed the government’s 3 percent ceiling for several quarters.