U.K. Economic Growth Stagnated in Second Quarter

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 to pressure on the Bank of England to set aside concerns about inflation and cut interest rates. Policy makers led by Governor Mervyn King left their key rate unchanged for the past four months after the consumer price index surged to 4.4 percent, more than double the government's target.

``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.''

The pound fell 0.7 percent against the dollar to $1.8608, continuing a fall from a peak above $2.11 in November.

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 Prime Minister Gordon Brown, who is battling to regain 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.''

Consumer Contraction

Household spending and construction shrank after the housing market slumped the most in at least a quarter century. Service industries, which range from banks to airlines, grew at the slowest rate since 1995.

Banks worldwide have shed more than 10,000 jobs and suffered $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.

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.

Rates Debate

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 Jryan13@bloomberg.net