UK recovery from recession stronger than expected

[February 26, 2010]  LONDON (AP) -- British economic growth in the final quarter of 2009 was revised upward slightly on Friday, assuaging fears that a second estimate on the data would reveal that the country hadn't exited recession after all.

With more data collated, the Office for National Statistics estimated that gross domestic product in the October to December quarter was 0.3 percent, an improvement from the 0.1 percent it forecast in its preliminary estimate last month.

The report should come as a relief to Prime Minister Gordon Brown's Labour Party as it heads toward what is expected to be a closely fought general election, but economists cautioned against reading too much into the improvement.

They pointed out that the figure is still weaker than original expectations and a downward revision to third quarter GDP has widened the annual rate of contraction in the economy to 3.3 percent from 3.2 percent.

Most economists expect Britain to struggle to reach 1 percent growth this year.

"The return to positive growth was driven primarily by a slowdown in the rate of inventory unwinding, hardly the basis of a strong recovery," said Capital Economics economist Jonathan Loynes. "Overall, the upward revision is welcome, but does not alter the picture of a very fragile recovery."

The second output figure -- based on more than three-quarter of the data that goes into the final figure due at the end of next month, compared with the 40 percent used for the first estimate -- did show the economy's recent performance has been slightly underestimated.

Economists had started to worry in recent days that the figure would be revised downward, a concern that was emphasized by data out Thursday showing a 5.8 percent drop in business investment in the same quarter.

Downbeat figures on retail sales and mortgage lending at the start of this year have also knocked confidence in the strength of Britain's recovery from a grinding 18-month downturn.

On the positive side, growth in the powerhouse services sector, which accounts for 75 percent of output, was revised up to 0.5 percent from 0.1 percent, the strongest rise since before the start of the recession in early 2008.

Output from production industries was lifted to 0.4 percent from 0.1 percent and the manufacturing sector registered growth of 0.8 percent, twice as fast as previously thought.

Figures for household spending also hinted at an upturn in consumer spending as the impact of record low interest rates and sales tax cuts worked through the economy.

Household expenditure rose by 0.4 percent over the quarter, the biggest rise since the opening three months of 2008.

However, the good news was tempered by a 3.1 percent fall in investment and a bigger rise in imports than exports, knocking 0.2 percent off GDP.

Revisions to previous quarters' growth also revealed that the downturn was the deepest on record, showing a 6.2 percent peak-to-trough slump. That exceeded the 6 percent fall recorded 30 years ago in the early years of the government of Conservative Party Prime Minister Margaret Thatcher.

Britain is the last major economy to return to growth after the global credit squeeze. It was hit particularly hard because of its huge banking and financial-services sector centered in London, which had to be propped up by the government's multibillion-pound bailout of major banks, and higher levels of personal debt among consumers. Like the U.S., it also faced a collapsed real estate bubble.

The fallout cost the country 100 billion pounds ($160 billion) in lost output. Some 1.3 million people were laid off, unemployment rose as high as 7.9 percent and around 50,000 families had their homes repossessed.

The European Commission earlier this week lowered its forecast for UK economic growth this year to 0.6 percent, from the 0.8 percent it predicted in November. That's far lower than the British government's own forecasts for growth this year of 1-1.5 percent and further growth of 3.5 percent in each of 2011 and 2012. It's also a sharp contrast to the International Monetary Fund forecasts of world economic growth of 4 percent and U.S. growth of 2.7 percent.

[Associated Press; By JANE WARDELL]

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