U.K. Economic Growth Stagnated in Q2

The U.K economy stagnated unexpectedly in the second quarter, ending the nation's longest stretch of economic growth in more than a century.

GDP 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 pressure on the Bank of England to set aside inflation concerns and cut interest rates. It also worsens Prime Minister Gordon Brown's struggle to salvage his reputation for economic competence. The pound fell more than 1 percent against the dollar and weakened against the euro.

Business investment fell 5.3 percent, the most in 23 years. Household spending declined for the first time since 2005, falling 0.1 percent.

Industrial production, which includes manufacturing as well as utilities and oil and gas extraction, has now contracted for two consecutive quarters. Construction also shrank. Service industries, which range from banks to airlines, grew at the slowest rate since 1995.

The U.K. currency declined as much as 1.1 percent to $1.8550 against its U.S. counterpart. It has already posted its longest run of declines in at least 37 years against the dollar this month. Against the euro, the pound weakened as much as 0.7 percent to 79.86 pence from 79.32 yesterday.

The implied rate on the December futures contract fell 2 basis points to 5.72 percent. The contract settles to the three- month London interbank offered rate for the pound, which was set at 5.76 percent today.

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.

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.

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.

U.K. Economic Growth Stagnated in Q2

TradingEconomics.com, Bloomberg
8/22/2008 8:08:50 AM