Exports returned the British economy to growth in the first quarter as soaring food and energy costs eroded household incomes and curbed consumer spending.

Gross domestic product rose 0.5 percent from the fourth quarter, the same as previously estimated, the Office for National Statistics said on Tuesday in London. The pace of growth from a year earlier was revised to 1.6 percent from 1.8 percent.
Concern about economic growth is taking precedence over inflation as rising prices and government budget cuts put Britain on course for the biggest squeeze on living standards since the 1970s. The Bank of England kept its key interest rate at a record low this month and some officials said more bond purchase may be needed if weakness persists.
“The recovery is going to be sluggish and consumer spending will continue to be weak, or more likely actually fall,” Jonathan Loynes, chief European economist at Capital Economics in London, said before the report. “We may see another bout of quantitative easing at some point if the economic recovery continues to disappoint.”
Real household disposable incomes fell by 0.8 percent following a 0.9 percent drop in the fourth quarter and consumer spending declined 0.6 percent, the largest drop since the second quarter of 2009. Business investment fell 3.2 percent, the most since the third quarter of the same year.
-----------------Export boost
The pound extended its decline against the dollar after the data were published. It traded at $1.5958 as of 9:32 a.m. in London, down 0.2 percent from Monday. Bonds declined, with the yield on the 10-year gilt up 3 basis points from Monday to 3.19 percent.
The economy expanded largely thanks to exports, with net trade contributing 1.4 percentage points to growth, the most since 1979, as the pound’s depreciation since early 2007 gave UK goods a competitive edge. Manufacturing output grew 0.7 percent from the fourth quarter and services, the largest part of the economy, increased 0.9 percent. Construction fell 3.4 percent, the largest decrease since the first quarter of 2009.
While UK inflation was 4.5 percent in May, more than twice the Bank of England’s target, Governor Mervyn King has said the current price surge is temporary and has defended keeping the key rate on hold to aid the economic recovery. He is due to speak at a UK Parliament committee at 10 a.m.
J Sainsbury Plc (SBRY), the UK’s third- largest supermarket chain, said on June 15 that more customers are switching to its own brands to save money as household incomes shrink.
-------------------Consumer squeeze
The squeeze on household budgets is weighing on an economy that has recouped barely more than a third of the output lost during the recession, leaving Britain lagging behind recoveries in the U.S., Germany and France. The International Monetary Fund lowered its 2011 UK growth forecast this month to 1.5 percent from 1.7 percent in April.
Real incomes fell last year for the first time since 1981 and the UK Treasury predicts a further drop this year, marking the first back-to-back decline since the 1970s oil crisis and recession.
Household savings stood at 4.6 percent of disposable income in the first quarter, down from 5.1 percent in the fourth quarter, suggesting the squeeze on incomes is forcing consumers to dip into their savings.
Separately, the statistics office said the current account deficit narrowed to 9.4 billion pounds ($15 billion) in the first quarter from 13 billion pounds in the previous three months. As a percentage of GDP, the deficit fell to 2.5 percent from 3.5 percent. The deficit on trade in goods narrowed to 22.2 billion pounds.
(Source: Bloomberg)