Consumer spending drops 1.2 pct in UK

Bloomberg

U.K. consumer spending slumped the most since 1980 and companies ran down inventories at a record pace in the first quarter as the country’s recession deepened.

Gross domestic product dropped 1.9 percent in the period, the most since 1979, the Office for National Statistics said Friday. That was in line with the original estimate last month. About a third of the contraction was due to the decline in inventories, which dropped 6 billion pounds ($9.4 billion). Consumer spending fell 1.2 percent and investment dropped 3.8 percent.

The figures highlight the challenge facing Prime Minister Gordon Brown after Standard & Poor’s said Thursday Britain’s worsening fiscal health may force it to cut the country’s AAA credit rating for the first time. While Bank of England Governor Mervyn King says that the recovery will be "slow and protracted," some economists are nevertheless optimistic the recession will trough in the first half.

"Hopefully the first quarter was the biggest rate of contraction," said Willem Buiter, a professor at the London School of Economics. "But the economy will be shrinking into next year We’ll be in recession and have sharply rising unemployment for the next year or year and half."

Previous data on services and construction were unrevised, the statistics office said. The drop in manufacturing was revised up to 5.5 percent from 6.2 percent estimated in April.

The report came on the same day that British Airways, Europe’s third-largest carrier, said "no immediate improvement" was visible in the global economy. On Thursday, S&P said Britain is at risk of a downgrade as debt heads to 100 percent of gross domestic product amid the worst recession since World War II.

The slump in inventories may point to a recovery in production later this year, Bank of England Deputy Governor Charles Bean said Thursday. He added that "the bottom in activity may not be far off."

"To preserve cash flow, companies have slashed stockpiles rather than produce more goods," said Philip Shaw, chief economist at Investec Securities in London. "That’s had a massive negative effect on the economy, but in the medium term there’s a limit to how much they can do this. As inventories are shed at a slower pace, it will support growth."

Policy maker David Blanchflower, who predicted the recession before other officials, said Thursday that the economy may be about "three quarters" through the slump.

There are other signs that the deterioration has slowed. Retail sales rose for a second month in April and an index of services industries jumped the most since 1999. Britain is partly relying on a global pick up that will probably be muted. Federal Reserve Bank of Boston President Eric Rosengren said Thursday that a "rather slow recovery is likely" and Bundesbank President Axel Weber said last week it is "not advisable" to assume that recovery is "safely on track."

The U.K. central bank’s quarterly economic forecasts showed this month that the economy won’t return to growth on an annual basis until the second quarter of next year and that inflation won’t reach its 2 percent goal by 2012. King said on May 13 that "inflation is more likely to be below the target than above."

Chancellor of the Exchequer Alistair Darling predicted in his April 22 budget that the economy will contract 3.5 percent this year, and rebound with a 1.25 percent expansion in 2010.

That’s at odds with the International Monetary Fund, which predicts a GDP drop of 0.4 percent next year after shrinking 4.1 percent in 2009.

The size of the recession means Britain needs to sell a record 220 billion pounds of bonds in the fiscal year through March 2010.

That’s likely to hobble Brown’s ability to spend much before the next election, which must be held by June 2010.

A BPIX survey published May 17 showed Brown lagging behind the Conservatives by 22 points."With unemployment set to continue its upward trend, and the prospect of a marked fiscal tightening looming large on the horizon after the next election, it is likely to be a long time indeed before the U.K. returns to a period of robust and steady expansion," said Colin Ellis, an economist at Daiwa Securities SMBC Europe in London.