U.K. Economy Grows Faster Than Forecast on Spending

U.K. Economy Grows Faster Than Forecast on Spending

Dec. 20 (Bloomberg) -- The U.K. economy expanded faster than economists forecast in the third quarter, driven by the strongest consumer spending in more than a year.

Gross domestic product increased 3.3 percent in the three months through September from a year earlier, the Office for National Statistics said in London today. The reading was higher than the 3.2 percent previously estimated by the government, which was the median forecast of 26 economists in a Bloomberg News survey. On the quarter, the economy expanded 0.7 percent.

Economic growth may have peaked after a worldwide credit market slump swelled losses at banks and provoked a slowdown in the housing market. Bank of England policy makers made their first unanimous decision for a rate cut in six years this month, saying that financial market turmoil posed a greater threat to the economy than faster inflation.

``This was three months ago,'' said James Knightley, an economist at ING Financial Markets in London. ``Growth risks are toward the downside'' and ``if you add in the housing market worries, it does suggest we could get broad-based weakness in the coming months.''

The pound fell $0.0063 against the dollar to $1.9909 at 10:26 a.m. in London. The U.K. currency dropped below $2 for the first time in three months yesterday.

Consumer Spending

Consumer spending expanded 1.1 percent in the quarter from the previous three months, the most since the second quarter of 2006 and higher than the 1 percent previously estimated, the statistics office said. Fixed investment in the quarter was revised up to 2.4 percent from 1.6 percent measured last month.

Bank of England policy makers made their first unanimous decision for a rate cut since 2001 this month, lowering the rate to 5.5 percent. Prime Minister Gordon Brown said yesterday that Britain is prepared to withstand turmoil in financial markets because of decisions he made to keep a lid on inflation.

The central bank, Federal Reserve and European Central bank have all made short-term loans with looser conditions this week in an effort to bring down interbank credit costs and prevent a cash shortage from turning into a credit crunch.

Banks have developed a ``disturbing'' reluctance to lend to one another that may spark a self-reinforcing deterioration of credit conditions, Bank of England Governor Mervyn King said this week. ``A painful adjustment faces the global banking sector over the next few months.''

Bank Writedowns

HBOS Plc, based in Edinburgh and the nation's biggest mortgage lender, said Dec. 13 increased funding costs are offsetting higher rates on mortgage loans, and that writedowns will cut profit by 180 million pounds ($359 million). Banks worldwide have racked up more than $70 billion of losses from the collapse of the U.S. subprime mortgage market.

``We haven't seen a financial crisis like this in about 10 years, and we would be flirting with the risk of recession if they hadn't cut rates in December,'' said Alan Clarke, an economist at BNP Paribas SA in London, who yesterday predicted a rate reduction in January. ``They are really taking this very seriously.''

Services expanded 0.8 percent in the quarter, down from a previous estimate of 0.9 percent the statistics office said. Manufacturing growth stalled, as measured last month.

Housing Market

While a pool of pent-up demand will support property values next year, the credit squeeze will keep prices from rising, the Royal Institution of Chartered Surveyors said in a report today, the latest showing that the decade-long housing boom that supported consumer spending is coming to an end.

Inflation concerns prevented policy makers from cutting the rate by more than a quarter-point this month, minutes of the Dec. 6 meeting published yesterday show. Consumers' price expectations jumped to the highest in at least eight years in November as food and energy prices soared, a central bank survey showed Dec. 13. Crude oil reached a record $99.29 on Nov. 21.

The implied deflator fell to an annual 2.9 percent in the third quarter from 3.9 in the previous three months, the statistics office said today.

The current-account deficit widened to 20 billion pounds in the third quarter, the most since records began in 1948, the statistics office said today in a separate report.

BLOOMBERG