GDP

UK first quarter GDP growth confirmed at 0.5 pct

AP News
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Posted: May 25, 2011 7:10 AM
UK first quarter GDP growth confirmed at 0.5 pct

Britain's economy grew 0.5 percent in the first quarter of this year, according to statistics released on Wednesday as the OECD cut its own growth forecasts for the country and warned that the Bank of England should raise interest rates to dampen public expectations of high inflation.

The news that the Office for National Statistics had left its estimate unchanged in its first revision of the data means the British economy is treading water _ the first-quarter growth simply cancels out a 0.5 percent decline in gross domestic product in the last quarter of 2010.

The expansion in the first three months of the year was largely due to export growth, which countered the biggest decline in consumer spending for almost two years.

Household spending declined 0.6 percent in real terms, its biggest drop since the second quarter of 2009 after consumers were squeezed by the failure of wages to keep pace with inflation. That followed a 0.3 percent drop in the final quarter of 2010.

Business investment also declined 7.1 percent quarter-on-quarter, in its biggest fall for two years

In more positive news, the deficit for net trade decreased to 5.7 billion pounds in the quarter, from 11.5 billion pounds the previous year, as exports increased and imports decreased. That was its biggest upward contribution to growth from net trade since records began in 1955.

IHS Global Insight economist Howard Archer said the data reinforced concerns about the underlying strength of the economy and its ability to withstand tough government austerity measures via spending cuts that began taking effect from April.

"The muted first-quarter rebound in GDP growth _ and somewhat mixed data and survey evidence for the second quarter so far _ reinforces our suspicion that growth will be limited going forward as the fiscal squeeze increasingly kicks in, some temporary growth drivers wane and consumers limit their spending in the face of serious headwinds, most notably the major squeeze on their purchasing power," said Archer.

Prime Minister David Cameron has pledged 80 billion pounds ($130 billion) of spending cuts and 30 billion pounds in extra taxes to trim Britain's huge deficit, but opponents say the austerity measures risk sending the country backward into a double-dip recession.

The data was released as the OECD cut its growth forecasts for the British economy to 1.4 percent this year and 1.8 percent next year _ the third time it has downgraded its outlook for the country since November. The figures contrast with forecasts of 1.7 percent and 2.5 percent, respectively, from the Office for Budget Responsibility _ the data officially accepted by the British government.

In its twice-yearly update on world economic growth, the OECD supported the Bank of England's decision to keep interest rates unchanged at a record low of 0.5 percent since March 2009 in the face of fiscal tightening, but said that it should raise rates to 1 percent by the end of this year to stave off inflation expectations.

Consumer price inflation hit 4.5 percent on an annual basis in April _ more than double the central bank's target _ and Governor Mervyn King warned Britons earlier this month that it is likely to reach 5 percent later this year.

Andrew Goodwin, senior economic advisor to the Ernst & Young ITEM Club economic consultancy, was more upbeat, saying he believed the statistics office data understates the underlying strength of the economy.

"Clearly this is not a 'normal' recovery but evidence from the business surveys and the labour market suggests that there is some forward momentum," Goodwin said.

The estimate will be revised one more time next month _ each revision adds newly gathered data to give a fuller picture.