< Back to News

U.K. Expands Faster Than Estimated on Growth in Construction, Inventories


The U.K. economy expanded faster than previously estimated in the second quarter in the biggest growth spurt since 2001 as companies rebuilt stocks and construction work surged.

Gross domestic product rose 1.2 percent from the previous three months, the Office for National Statistics said today in London. That was higher than the 1.1 percent initial estimate, which was the median forecast of 25 economists in a Bloomberg News survey. On the year, the economy expanded 1.7 percent.

Britain’s growth pickup may deepen the divide among policy makers as the Bank of England considers whether the economy faces a greater threat from inflation or needs more stimulus to avert a further recession. The pound declined after the report, which showed slower services growth than previously estimated and a drop in fixed investment.

“The third quarter looks like it’s started pretty well,” James Knightley, an economist at ING Financial Markets, said in a telephone interview. “Momentum can be continued into the next few months,” though “we should be looking at growth being subdued over the coming years and that could raise the prospect of further stimulus rather than a withdrawal.”

The pound fell more than 0.2 percent against the dollar after the data were published. The currency traded at $1.5504 as of 9:47 a.m. in London. The yield on the benchmark two-year government bond was down 2 basis points today at 0.618 percent.

Budget Squeeze

The U.K. faces the biggest budget squeeze since World War II, which has undermined consumer confidence. Ed Balls, a candidate for the leadership of the U.K.’s opposition Labour Party, said today that the government’s plans to cut the budget deficit immediately risk pushing Britain back into recession.

At the same time, a debt crisis threatens the recovery in the euro region, the U.K.’s largest trading partner, and there are signs the global recovery is cooling.

The U.S. economy probably grew at a 1.4 percent annualized pace in the second quarter, slower than the 2.4 percent rate projected last month, according to the median forecast of 81 economists surveyed by Bloomberg. That would be the slowest growth since the second quarter of 2009 when the economy was still contracting. That data will be released later today.

Construction Surge

The U.K. GDP figure was revised up after construction expanded faster than previously estimated, rising 8.5 percent on the quarter, the most since 1982. Inventories rose by 983 million pounds ($1.5 billion) in the first evidence of stock- building by companies for seven quarters, the statistics office’s report showed.

Consumer spending rose 0.7 percent and government expenditure increased by 0.3 percent, the statistics office said. That offset a 2.4 percent drop in fixed investment.

Growth in services, which account for about three quarters of the economy, was revised down to 0.7 percent from 0.9 percent, the statistics office said. Faster expansion in business services was outweighed by a drop in air transport during a quarter when European airspace was disrupted by an ash cloud caused by volcanic activity in Iceland.

The “breakdown of GDP shows that the recovery is built on very fragile foundations,” said Samuel Tombs, an economist at Capital Economics Ltd. in London. “Household and government spending did both post solid rises, but both sectors are very unlikely to maintain such growth rates as the fiscal squeeze kicks in over the coming quarters.”

‘Cautious’

The Office for Budget Responsibility, the government’s new fiscal monitor, said last month that Chancellor of the Exchequer George Osborne’s spending cuts have increased the chance the U.K. may plunge back into recession. The measures will slice 85 billion pounds from expenditure, equivalent to 5.7 percent of GDP, according to Institute for Fiscal Studies estimates.

WPP Plc, the world’s largest advertising company, said on Aug. 24 it is “cautious” about the outlook due to concerns about the impact of the budget cuts and about the potential contagion from the fiscal crisis in the euro zone.

The Bank of England held its bond-purchase plan at 200 billion pounds and kept the main interest rate at a record low of 0.5 percent on Aug. 5 to aid the economic recovery. The central bank forecast earlier this month that consumer spending will keep growing at a “modest rate” in coming quarters.

Policy maker Andrew Sentance still repeated his call for an interest-rate increase this month, saying that economic conditions have improved and that the outlook for inflation justifies gradual withdrawal of stimulus.

In a separate report, the statistics office said that business investment fell by 1.6 percent from the previous quarter. On the year, it increased by 1.9 percent.