U.K. Economy Accelerated in the Second Quarter on Consumption

The U.K. economy accelerated in the second quarter, driven by consumer spending and business services, putting it on course for the best growth performance in three years.

Gross domestic product increased 0.8 percent from the first quarter, the Office for National Statistics said in London today. All but two of the 31 economists surveyed by Bloomberg News correctly forecast the figure, which was unrevised from a July 20 estimate. From a year earlier, the economy expanded 3 percent.

The U.K. economy has been fueled by a boom in London's financial-services industry and household spending. With the global credit market rout threatening to crimp banks' profits and consumers yet to feel the full impact of five interest-rate increases in a year, the outlook for growth is clouding over.

``This data is already out of date and it's playing a secondary role to what's happening in markets,'' said Gavin Redknap, an economist at Standard Chartered Bank. Still ``the consumer is about to slow down and the housing market is certainly cooling.''

Household consumption rose 0.8 percent in the second quarter, the most since the final three months of 2006. Government spending climbed by the same amount and investment dropped 1.1 percent, the biggest quarterly decline in four years. Exports declined 1 percent and imports fell 0.4 percent.

The GDP deflator, a measure of inflation used when calculating growth, was 3.8 percent in the second quarter, the highest since 1996.

Credit Conditions

The market turmoil is prompting economists to revise forecasts that growth and inflation will be fast enough to prompt the Bank of England to raise its benchmark rate as soon as next month. While the bank signaled Aug. 8 another move would be needed to contain inflation, economists at Barclays Capital and JPMorgan Chase & Co. say the rate will now stay at 5.75 percent.

``Credit conditions across the economy will tighten,'' said Barclays economists Simon Hayes and George Jones in a note to investors yesterday. ``This will negate the need for a further rise'' in the U.K.'s benchmark rate.

The pound, which climbed to a 26-year high of $2.0654 on July 24, has dropped 3 percent against the dollar since then and traded at $2.0017 at 8:50 a.m. in London.

Slower inflation and signs that higher borrowing costs are cooling the U.K. housing market may also encourage the central bank to wait. Consumer prices rose 1.9 percent in July from a year earlier, the first time that annual inflation has slowed below the 2 percent target since March 2006.

House Prices

London house prices, which have led the U.K.'s decade-long housing boom, fell for the first time in a year last month, said Rightmove Plc, the U.K.'s largest real-estate Web site, on Aug. 20. Rate increases over the past year have boosted the monthly repayment on an average 200,000-pound mortgage by about 100 pounds, according to the Council of Mortgage Lenders.

For now, consumer spending, financial services and manufacturing are still fueling the economy. The International Monetary Fund said July 25 growth will accelerate to 2.9 percent this year from 2.8 percent in 2006. That compares with forecasts of 2 percent for the U.S. and 2.6 percent for the 13 euro countries and Japan.

U.K. retail sales unexpectedly rose by the most in five months in July as price cuts by stores lured shoppers and factory orders surged to a 12-year high this month.

Hampson Industries Plc, a U.K. maker of parts used in gas turbines, said Aug. 21 earnings at its aerospace-components and composite divisions are beating its own forecasts as airlines order more planes.

``Aside from the recent market jitters, it doesn't feel like the economy is losing momentum,'' said Ross Walker, an economist at Royal Bank of Scotland Group Plc in London.