UK economy grew 0.5% in first quarter on services rebound

April 28, 2011 - 0:0

Britain’s economy rebounded in the first quarter by enough to erase the contraction of the previous three months on the strongest surge in service industry growth for four years.

Gross domestic product rose 0.5 percent from the final quarter of 2010, when it fell by the same amount, the Office for National Statistics said on Wednesday in London. The result matched the median forecast of 28 economists in a Bloomberg News survey. Services expanded by 0.9 percent, the most since 2006.
The economy’s production level has returned to where it was before the fourth quarter, when the coldest December in a century disrupted business across the country. Bank of England officials are split on whether growth is strong enough to withstand the biggest fiscal squeeze since World War II, allowing them to remove stimulus to fight inflation.
“The recovery is more muted than we would have liked though the data suggest some underlying strength,” Philip Rush, an economist at Nomura International Plc in London, said in an interview. “The bank will want to see more data showing output is normalizing and may want to wait until their forecast round in August.”
The pound rose more than 0.5 percent against the dollar after the report and traded at $1.6536 as of 9:44 a.m. in London. The yield on the benchmark two year gilt was up 4 basis points on Wednesday at 1.119 percent.
-------------‘Choppy’ recovery
“The government has always expected the recovery to be choppy,” the Treasury said in an e-mailed statement on Wednesday. “But together with continued reminders around the world of the risks facing countries that do not deal with their debts and deficits, Wednesday’s data shows that the government has set the right economic course.”
Britain is the first member of the Group of Seven nations to report official growth data for the first quarter. Services, which make up 76 percent of the economy, expanded after a 1 percent increase in business services and finance, the statistics office said.
Barclays Plc (BARC), the UK’s third-largest bank by assets, made a good start this year “in a challenging external environment,” Chief Executive Officer Robert Diamond said in a statement on Wednesday. Earnings at its investment banking unit declined by 33 percent after revenue fell.
-----------------Manufacturing rebound
UK manufacturing increased by 1.1 percent in the first quarter, driving a 0.4 percent gain in industrial production. Construction shrank 4.7 percent, the most in two years, the statistics office said.
While the pound’s drop of about 23 percent on a trade- weighted basis since the start of 2007 has boosted manufacturers by making British goods cheaper to buy abroad, they face pressure to raise prices because of higher commodity prices. The Confederation of British Industry said on Tuesday its measure of expected average selling prices for factories rose to 36 in April from 33 to reach the highest since January 1990.
Inflation reached 4 percent in March, double the bank’s 2 percent target, and prospects for consumer prices have split the central bank’s Monetary Policy Committee. Andrew Sentance, who has been voting for an increase since June, said on Tuesday in Manchester that annual price gains are likely to accelerate.
Minutes of the April decision showed Sentance maintained a push for a half-point increase, while Spencer Dale and Martin Weale kept up a call for a quarter-point move. The remaining six officials preferred to maintain the record low of 0.5 percent.
Price gains are also squeezing Britons’ spending power as Chancellor of the Exchequer George Osborne vows to stick to a plan to eliminate the bulk of the UK’s record deficit by April 2015. The spending bill fell by 6 billion pounds ($10 billion) in the year to March and will cut 310,000 jobs in the public sector.
(Source: Bloomberg)