U.K. GDP Falls Less Than Forecast 0.7%


The U.K. economy contracted less than previously estimated in the second quarter as manufacturing, auto services and government spending helped mitigate the biggest slump in business investment in 24 years.

Gross domestic product fell 0.7 percent, less than the 0.8 percent calculated last month, the Office for National Statistics said. The economy shrank 5.5 percent from a year ago, the most since records began in 1955.

The Bank of England this month extended its bond purchase program to 175 billion pounds ($286 billion) after the recession proved worse than it predicted in May. While growth may resume in the third quarter, the economy will likely take until almost 2012 to recover the output lost in the sharpest contraction since World War II, policy makers say. Capital spending plunged a record 15.2 percent last quarter from a year earlier.

The statistics office said the revisions to GDP last quarter were due to manufacturing, energy extraction and wholesale and motor vehicle services. The ONS said there is anecdotal evidence the improvement was helped by a government scrappage program, which offers consumers a 2,000-pound subsidy to trade in old vehicles for new ones.

The U.K. economy has contracted 5.5 percent since the recession began in the second quarter of last year, today’s figures show. In the early 1980s, the economy shrank 6 percent over seven quarters.

Bank of England forecasts published this month show output expanding in the third and fourth quarters with growth resuming on an annual basis from the first quarter next year as businesses replenish stocks and monetary easing begins to work.

Unemployment in Britain climbed to a 14-year high in the second quarter, and companies facing sluggish demand and tight credit conditions will continue to cut jobs well into 2010, limiting the pace of recovery, economists predict.

Consumer spending, which accounts for about two thirds of the U.K. economy, fell 0.7 percent in the second quarter, and government spending rose 0.8 percent.

Investment plunged 4.5 percent as companies slashed budgets for new equipment, vehicles and buildings. A report yesterday showing business investment fell 10.4 percent, the most since 1985, led some economists to expect a worse-than-expected economic contraction.

Inventories fell 4.58 billion pounds after a record 5.43 billion-pound drop in the previous three months, pointing to a rebound in output. As demand slumped earlier this year, factories scaled back production to clear stocks of unsold goods.

Manufacturing output fell 0.2 percent from the first quarter, less than the 0.3 percent first reported, and total industrial product declined 0.6 percent rather than 0.7 percent. Services firms from banks to airlines produced 0.6 percent less. Exports fell 2.7 percent in the quarter, and imports declined 3.2 percent.

Compensation of employees rose 1 percent after two quarters of declines when financial services companies cut bonuses. The gross operating surplus of corporation fell 3.6 percent.


TradingEconomics.com, Bloomberg
8/28/2009 9:37:51 AM