U.K. Economy Shrank Less Than Previous Estimate

By Svenja O’Donnell

Nov. 25 (Bloomberg) -- The U.K. economy shrank less than previously estimated in the third quarter as consumer spending stopped falling and the service industries slump eased, bringing the longest recession on record closer to an end.

Gross domestic product fell 0.3 percent from the previous three months, compared with a prior measurement of a 0.4 percent drop, the Office for National Statistics said today in London. The result matched the median prediction of 28 economists in a Bloomberg News survey.

Prime Minister Gordon Brown this week called for stimulus to stay in place to avoid “choking off recovery” as an election looms within six months. The Bank of England has expanded its bond purchase plan three times since March to ensure Britain’s escape from recession and Governor Mervyn King said yesterday the pickup isn’t “particularly strong.”

“We’re still confident the fourth quarter number will show positive growth,” Philip Shaw, chief economist at Investec Securities in London, said before the report. “It’s likely to be a slow, steady grind through 2010.”

The pound erased gains against the dollar and was trading at $1.6682 as of 9:35 a.m. in London. U.K. government bonds extended gains, pushing yields lower. The yield on the 2-year gilt fell 4 basis points to 1.19 percent.

The U.K.’s recovery has lagged behind that of the U.S. and the euro area, which have both returned to growth. Data yesterday showed Germany’s economic growth accelerated in the third quarter, while the U.S. economy expanded at a 2.8 percent annual rate, less than the government reported last month.

Election Fight

Brown is trying to revive the U.K. economy in time to defeat Conservative Leader David Cameron at the election, due by June. An Ipsos Mori poll in the Observer on Nov. 22 showed the Conservatives with a six-point lead, the least since December.

Consumer spending was unchanged in the third quarter, the first time it hasn’t dropped in a 1 1/2 years. Government spending rose 0.2 percent, while fixed investment fell 0.3 percent, the statistics office said.

Officials revised up the GDP data because the decline in services output was smaller than previously estimated, at 0.1 percent instead of 0.2 percent. Manufacturing dropped 0.1 percent, up from the prior measurement of 0.2 percent.

The Bank of England forecasts Britain will exit the recession in the fourth quarter. The economy will expand 2.2 percent in 2010 and 4.1 percent in 2011, according to policy makers’ projections published on Nov. 11.

Policy makers have cut the benchmark interest rate to a record low of 0.5 percent and pledged to buy 200 billion pounds in bonds to aid the economy. While policy maker Adam Posen told lawmakers that “one hopes that we are coming to the end” of the purchase program, King said he “can’t rule out” buying more assets.

Data ‘Surprise’

Policy maker Andrew Sentance said in a speech on Nov. 16 that the “surprise” gross domestic product estimate may be revised later, and told Bloomberg Television that “the broad balance of evidence is that the U.K. economy has started to grow in the second half of this year.”

Unemployment rose at the slowest pace in 18 months in October, retail sales rose for a second month and the inflation rate increased more than expected, to 1.5 percent. The bank aims to keep inflation at 2 percent.

Banks are still working to shore up their finances after government-led bailouts of Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc during the 2008 financial crisis. Lloyds said yesterday it plans to raise a record 13.4 billion pounds in the country’s biggest rights offering.

None of the economists surveyed predict a downward revision in today’s data. Six of them forecast the estimate will remain unchanged, 19 said it will change to a 0.3 percent drop and three said that it will be 0.2 percent.

To contact the reporter on this story: Svenja O’Donnell in London at sodonnell@bloomberg.net