U.K. Economy Resumes Growth By Less Than Forecast

By Scott Hamilton

Jan. 26 (Bloomberg) -- The U.K. economy resumed growth by less than economists forecast in the fourth quarter as service industries and manufacturing expanded just enough to pull Britain out of its longest recession on record.

Gross domestic product rose 0.1 percent from the third quarter, the Office for National Statistics said today in London. The median forecast in a Bloomberg News survey of 33 economists was for a 0.4 percent increase and the lowest prediction was for a result of 0.2 percent.

Bank of England policy makers will study the data as they assess the strength of the recovery and decide next week whether to halt bond purchases and prepare to withdraw emergency stimulus measures. The weakness of the pickup may hamper Prime Minister Gordon Brown’s efforts to win an election by June as he campaigns on his plans to curb the budget deficit.

“It’s clearly disappointing,” Simon Hayes, chief U.K. economist at Barclays Capital and a former Bank of England official, said in a telephone interview. “The recovery is going to be uneven. I think the Bank of England will halt quantitative easing in February, but if we don’t see sustained growth it’s likely we may see them extend it in the middle of the year.”

The pound fell as much as 0.4 percent after the release and traded at $1.6147 as of 9:44 a.m. in London. The yield on the two-year government bond was down 1 basis point at 1.202 percent.

Record Drop

The recession, which lasted for six consecutive quarters, has shaved 6 percent off GDP, the statistics office said. The economy shrank 4.8 percent in 2009, the biggest annual drop since records began in 1949, officials said.

The economy contracted 3.2 percent from a year earlier in the fourth quarter, compared with a median decline of 3 percent forecast in a Bloomberg News survey of 30 economists.

The data, the first for the fourth quarter from a Group of Seven nation, means Britain is the last of them to exit the recession sparked by the worst financial crisis since the Great Depression. The U.S. will release GDP data for the fourth quarter on Jan. 29.

Brown said yesterday that he is confident the U.K. is emerging from recession, though the economy “remains fragile” and the biggest mistake Britain could make would be to withdraw economic stimulus measures too early. Brown and Conservative leader David Cameron are battling to convince voters they are best placed to cut the ballooning budget deficit without hurting the economic recovery.

Services, Manufacturing

Services, which make up 76 percent of GDP, expanded 0.1 percent on the quarter. Industrial production grew 0.1 percent and within that, manufacturing rose 0.4 percent, the statistics office said. Construction output stayed unchanged from the previous three months.

Close Brothers Group Plc, the 131 year-old London-based investment bank, said last week earnings this year will be “solid” after reporting a “good” end to the year. “However, this will depend on the prevailing economic environment and financial market conditions,” the company said Jan. 22.

Bank of England Governor Mervyn King said last week the U.K. faces “a long period of healing” as “at this very early stage of the recovery, it is particularly difficult to judge the medium-term prospects for the economy.” Policy makers will decide next week whether to halt bond purchases after buying 200 billion pounds ($325 billion) so far.

To contact the reporter on this story: Scott Hamilton in London at shamilton8@bloomberg.net