Financial thoughts

The U.K. economy expanded slower than forecast in the fourth quarter as consumer spending growth was revised lower and government expenditure fell.

Gross domestic product increased 2.8 percent in the three months through December from a year earlier, the least since 2006, the Office for National Statistics said in London today. The result was lower than the 2.9 percent previously estimated, which was the forecast of all 25 economists in a Bloomberg News survey. On the quarter, the economy expanded 0.6 percent.

Bank of England Governor Mervyn King said this week he sees “a sharp slowing in growth coming'' as financial-industry turmoil limits expansion in other areas of the economy. Consumer confidence fell to a 15-year low in March and house prices rose the least since 1996, separate reports showed today.

“A recession is heading our way,'' Neil MacKinnon, chief economist at ECU Group in London and a former U.K. Treasury official, said in a Bloomberg Television interview. “The indicators on consumer spending and house prices are key. No-one is going to be able to escape the credit crunch.''

The pound was little changed against the dollar after the report, trading at $1.9968 at 10:09 a.m. in London.

Consumer spending expanded 0.1 percent in the quarter, half of the previous estimate, the statistics office said. Government spending fell 0.5 percent, helping to offset a 1.8 percent gain in fixed investment.

Services, Factories

Services expanded 0.7 percent in the quarter, up from a previous estimate of 0.6 percent the statistics office said. Manufacturing growth was flat.

Central bankers around the world are pumping cash into their financial systems to limit the damage from the collapse of the U.S. subprime mortgage market. Banks have announced more than $200 billion in writedowns and credit losses linked to the slump, prompting firms to curb lending and weighing on the residential property market and consumer confidence.

The U.K. current account gap narrowed to 8.5 billion pounds ($17 billion) from 19.1 billion pounds in the third quarter. Foreign banks recorded losses from writedowns in the U.K., making an 8.6 billion-pound deficit on their earnings, the biggest since records began half a century ago and the first negative result since 1998, the statistics office said.

The Bank of England is counting on a weaker pound to boost U.K. exports and narrow the current-account deficit, which reached a record high in the third quarter.

Account `Concern'

“We've been concerned for some time,'' about the current account deficit, King told lawmakers March 26 http://payday-nofax.com. “Some adjustment is necessary.'' The recent decline in the pound “has been the unwinding of the appreciation'' in 2006.

A gauge of Britons' sentiment fell 2 points to minus 19 this month, a 15-year low, on concern the slowdown is poised to deepen, according to GfK NOP Ltd.

U.K. house prices rose in March at the slowest pace in more than a decade, gaining 1.1 percent from a year earlier, Nationwide Building Society said today. On the month, prices fell 0.6 percent.

Lehman Brothers Holdings Inc. yesterday said slowing house prices will tame the U.K.'s expansion. The bank cut its forecast for growth next year to 1.1 percent from a previous prediction of 2 percent. It also sees house prices declining 8 percent by the end of 2009.

The signs of slower growth are challenging policy makers charged with keeping inflation at the 2 percent target, King said. While the cooling poses a risk that the consumer price index will slip below the bank's goal, rising commodity prices threaten to keep prices elevated.

Rate Vote

Seven of the Monetary Policy Committee's nine members voted for no change in the key rate after two quarter-point reductions since December to guard against faster inflation getting entrenched in the economy. King said this week that the consumer price index may exceed the government's 3 percent limit this year.

“We have quite a sharp slowing of growth coming,'' King told lawmakers. “There's a difficult balancing act at present because there are risks at either side. There is concern and lack of confidence in all financial markets around the world.''

Some economists, including James Knightley at ING Financial Markets, have brought forward forecasts for the next Bank of England interest-rate cut to April from May after King signaled policy makers were more disposed to lower borrowing costs.

Some analysts say the threat to growth from a worldwide surge in borrowing costs adds to the case for bigger rate cuts.

“They're behind the curve,'' DeAnne Julius, a member of the bank's rate-setting panel from 1997 to 2001, said in a Bloomberg Television interview yesterday. “If I were still on the committee I'd be voting for a half-a-point cut'' in April.

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