April 25, 2013 / 8:35 AM / 5 years ago

Britain avoids recession with jump in first-quarter growth

LONDON (Reuters) - Britain’s economy dodged a return to recession and grew faster than expected in the first three months of this year, providing some political relief for a government under fire over its austerity drive.

A man walks past a row of derelict houses in Stoke on Trent, central England April 24, 2013. Britain's economy dodged a return to recession and grew faster than expected in the first three months of this year, a relief for finance minister George Osborne. The Office for National Statistics said on April 25, 2013 Britain's gross domestic product rose 0.3 percent in the first quarter after shrinking by 0.3 percent quarter-on-quarter in late 2012, above forecasts for a 0.1 percent rise. Photograph taken on April 24, 2013. REUTERS/Phil Noble

The Office for National Statistics said Britain’s gross domestic product rose 0.3 percent in the first quarter, well above forecasts for a 0.1 percent rise.

The economy shrank 0.3 percent quarter-on-quarter in late 2012, so a second contraction would have put Britain into its third recession in less than five years.

Year-on-year, the latest GDP reading was 0.6 percent higher, the strongest rise since the end of 2011.

Finance minister George Osborne said Thursday’s data was encouraging and vowed to stay the course on fixing Britain’s budget problems.

“We all know there are no easy answers to problems built up over many years, and I can’t promise the road ahead will always be smooth, but by continuing to confront our problems head on, Britain is recovering and we are building an economy fit for the future,” he said in a statement.

Sterling hit its highest level in two months against the dollar after the data and British government bond prices fell.

Britain’s preliminary GDP figures are one of the first for a major advanced economy, and based mostly on estimated data, but it would be rare for a reading this high to be revised down into negative territory.

The rise was driven by strong services sector growth and a bounce-back in North Sea oil and gas output.

Politically, a slip back into recession would have been difficult for the government in general and Osborne in particular, coming just days after ratings agency Fitch stripped Britain of its top-notch credit rating.

Osborne is sticking to his commitment to eliminate Britain’s underlying budget deficit in five years, betting that growth will pick up in time for a national election in May 2015 despite sluggish expansion forecast to be just 0.6 percent this year.

But the International Monetary Fund - previously supportive of Britain’s approach to deficit reduction - thinks some cuts may need to be deferred given the weakness in demand.

An IMF mission visits Britain next month for an assessment of the country’s economy that could include recommendations for a change of course.

The stronger-than-expected reading may help Osborne when he tries to convince the IMF that Britain’s economy is on track for recovery, and that he is right to stick with his current plans.

PITFALLS AHEAD

Analysts warn of a broader problem of stagnation that has led some to warn that Britain risks a Japanese-style ‘lost decade of near-zero growth.

Britain’s GDP remains 2.6 percent below its peak in the first quarter of 2008 and even with Thursday’s data, has stagnated for the past 18 months.

Rob Wood, an economist at Berenberg Bank, said a recovery appeared to be on the horizon but pitfalls lay ahead.

“The economy seems to have done a little better than the main surveys suggested but it is hardly a picture of rude health right now,” he said. “We suspect there will be another couple of disappointing quarters to get through before the UK can see a return to sustainable growth.”

Britain has been much slower to recover from the financial crisis than most other big economies. Weak demand from a recession-hit euro zone, a drag from the government’s deficit-reduction measures and high inflation eating into meager wage rises are all to blame.

Furthermore, the global economy is weakening and there are signs of slowing growth in the United States and China.

Britain’s government and the Bank of England are making some efforts to boost growth without requiring more public spending, including seeking to expand bank lending .

The first-quarter rise in output was driven by a broad-based increase in services output, building on a strong January, with the motor trade particularly strong.

Industrial output was lifted by the biggest rise in the mining and quarrying sector since 2002, as some North Sea oil and gas fields came back on line after lengthy maintenance that depressed output in 2012.

Additional reporting by Li-mei Hoang Editing by Jeremy Gaunt.

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