Economy Seen Posting Best Performance in Four Years: U.K. Credit

The UK economy probably expanded
at its fastest pace in four years in the first quarter as the
Bank of England maintained record-low interest rates to cement
the recovery.
Gross domestic product rose 0.9 percent, up from 0.7
percent in the final three months of 2013, according to the
median of 39 estimates in a Bloomberg News survey. It would be
the strongest performance since the second quarter of 2010.
The rebound has put Britain on course to be the fastest-growing Group of Seven nation this year, fueling speculation
that BOE policy makers led by Governor Mark Carney might raise
borrowing costs as early as the fourth quarter. Officials have
pledged to keep the key rate at 0.5 percent until the economy
has used up more of its slack.
"This year should see a continued recovery at a reasonably
brisk pace," Philip Rush, an economist at Nomura International
Plc in London, said in an April 25 interview. "The positive
news on the economy should be bringing forward that time when
rate hikes are appropriate."
The Office for National Statistics will publish the data,
which will include estimates of services, construction and
industrial production, at 9:30 am tomorrow in London.
Forecasts in the Bloomberg survey range from 1 percent at firms
including Credit Suisse Group AG to 0.6 percent at Moody's
Spare Capacity
With unemployment already below the 7 percent threshold at
which the Monetary Policy Committee had pledged to consider
raising rates, the debate over policy now centers on the
economy's room to grow without triggering faster inflation.
One-month forward Sonia contracts signal the central bank
will boost the key lending rate -- on hold since March 2009 --
25 basis points by next April. Five of 32 economists in a
Bloomberg survey compiled this month expect a rate increase in
the fourth quarter.
The recovery has pushed up yields on gilts maturing in less
than five years. The extra yield investors demand to hold 10-year gilts over their two-year counterparts has fallen 50 basis
points, or half a percentage point, to 196 basis points this
Accelerating growth is a boost for Prime Minister David Cameron and Chancellor of the Exchequer George Osborne as they
prepare for European Parliament and UK local authority
elections on May 22. Their Conservative Party is trailing behind
the Labour opposition in opinion polls with just over a year to
go before the next general election.
BOE Forecast
BOE officials raised their UK forecasts this month,
estimating growth of about 1 percent in the first and second
quarters of the year.
The strength of the rebound over the past year has
surprised forecasters. After emerging from the deepest recession
since World War II in late 2009, the economy struggled to gain
traction and output in the fourth quarter was still 1.5 percent
below its pre-recession peak.
Consumer spending buoyed by a surging housing market has
driven the recovery, with data showing retail-sales growth
accelerated to 0.8 percent in the first quarter. A 0.6 percent
increase in house prices in April was the 15th consecutive
monthly gain, property researcher Hometrack Ltd. said today.
Today's GDP report may show the recovery is broadening.
Industrial production surged the most in eight months in
February, ONS figures show. Manufacturers' optimism rose to the
highest in 41 years in April, according to a gauge published
last week by the Confederation of British Industry.
Strengthening Growth
The CBI said today its composite survey indicator showed
growth gathered pace in April and expectations for the next
three months are the strongest since the data began in 2003.
The UK is the first G-7 nation to report first-quarter
GDP. The US economy, the world's largest, probably grew at a
1.2 percent annualized rate after a 2.6 percent rate in the
fourth quarter, economists said before a report on April 30.
Britain will outperform its G-7 peers this year, according
to the International Monetary Fund, which raised its forecast to
2.9 percent this month from 2.4 percent. A year ago, the
Washington-based lender was predicting growth of just 1.5
percent in 2014.
The economy expanded 1.7 percent last year, the most since
2010. The Bank of England raised its growth projections in
minutes of its April policy meeting, released last week.
Officials will publish new quarterly projections on May 14 that
will detail its assessment of slack in the economy, as evidenced
by indicators such as wage growth and part-time work.
Cooling Inflation
A three-month stretch of inflation below the bank's 2
percent target has also eased pressure on the MPC to increase
borrowing costs. It's also given a break to consumers, who are
seeing wage gains outpace price increases for the first time
since the financial crisis.
"The consumer recovery should receive more fundamental
support over the coming quarters," Jonathan Loynes, an
economist at Capital Economics Ltd. in London, said in a
statement. "We continue to expect overall household spending to
post solid gains of about 2.5 percent, or possibly more, both
this year and next."
There are also signs business investment is helping to
support a recovery that has so far relied on consumers saving
less of their income. Corporate spending rose 8.7 percent in the
fourth quarter from a year earlier and the Office for Budget
Responsibility, which oversees forecasting for the Treasury,
expects investment to grow about 8 percent per year over the
next four years.
"There is clear evidence that firms are now looking to
step up their borrowing as markedly improved economic activity
in recent months lifts their confidence and need for capital,"
said Howard Archer, an economist at IHS Global Insight in
To contact the reporter on this story:
Jennifer Ryan in London at
[email protected]
To contact the editors responsible for this story:
Craig Stirling at
[email protected]
Andrew Atkinson, Daniel Tilles
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