U.K. Economy Grows Faster Than Forecast on Services in Q3

Oct 19, 2007 - The U.K. economy grew faster than economists forecast in the third quarter, driven by services from airlines to banks, a sign higher borrowing costs have yet to cool expansion.

Gross domestic product increased 0.8 percent, the same as in the second quarter, the Office for National Statistics said in London today. Economists forecast 0.7 percent, according to the median of 34 predictions in a Bloomberg News survey. The annual growth rate was 3.3 percent, the most since 2004.

Service industries, which make up three-quarters of the economy, expanded as business and finance held at the quickest growth pace since 2003. Investors speculate bank earnings will now weaken after credit costs jumped. Bank stocks comprise 37 percent of the benchmark FTSE-100 index, whose 6 percent gain this year has lagged increases of 11.4 percent on the Dow Jones Industrial Average and 20 percent for Germany's DAX.

``The momentum coming into the U.K. economy in the services sector, particularly in the financial sector, will abate,'' Kenneth Wattret, an economist at BNP Paribas in London, said in an interview. ``That will put Bank of England rate cuts on the agenda for early next year.''

The pound rose 0.4 percent after the report and traded at $2.0493 as of 12:31 p.m. in London. The currency reached a 26- year high of $2.0654 on July 24.

Rate Increases

The Bank of England raised its benchmark rate to 5.75 percent in the year through July, leaving Britons with the highest borrowing costs in the Group of Seven industrialized nations and increasing the repayments on the nation's record 1.4 trillion pounds ($2.8 trillion) of consumer debt.

London, which rivals New York in some markets as the world's largest financial center, has led the U.K.'s economic growth after a banking boom prompted record bonus payouts of 8.8 billion pounds at the start of this year, the Centre for Economics and Business Research Ltd. estimates.

Contagion from the U.S. mortgage market collapse, which prompted a surge in borrowing costs, is spreading to the U.K. and Europe. A worsening U.S. housing slump sent profits lower at Bank of America Corp. and Washington Mutual Inc. yesterday, putting financial company earnings on pace for the worst quarter in at least a decade.

Business Services

Business and financial services, which account for 28 percent of the U.K. economy, expanded 1.7 percent, the statistics office said. Manufacturing growth slowed to 0.2 percent from 0.8 percent in the second quarter.

The International Monetary Fund on Oct. 17 raised its forecast for the U.K. economy this year, predicting growth of 3.1 percent, the fastest pace since 2004. The fund forecast expansion to slow to 2.3 percent in 2008. The group predicts the euro-region's economy will grow 2.5 percent this year and 2.1 percent next year.

The IMF also reduced its global growth forecast for 2008 and warned that it might still be too optimistic, given threats posed by the sell-off in credit markets. The U.K. GDP report is the first for the third quarter from a G-7 economy.

Britain's growth will be among the fastest of the G-7 this year and the economy is well placed to weather a slowdown, Chancellor of the Exchequer Alistair Darling told lawmakers in Parliament yesterday. The Labour government, led by Tony Blair until Gordon Brown replaced him as prime minister in June, has now overseen 41 consecutive quarters of growth.

Northern Rock Panic

The collapse of the U.S. subprime mortgage market led to a jump in credit costs and a panic among savers at Northern Rock, the Newcastle-Upon-Tyne, England-based home-loan lender.

A survey of U.K. banks shows they are now poised to reduce the supply of credit to companies ``significantly,'' the Bank of England said Sept. 26. Services expansion weakened to a 13-month low in September, the Chartered Institute of Purchasing and Supply and Royal Bank of Scotland Group Plc said Oct. 3.

U.K. house prices fell at the fastest pace in two years in September after higher interest rates and concern about the outlook for economic growth sapped homebuyers' confidence, the Royal Institution of Chartered Surveyors said Oct. 11.

Bank of England Governor Mervyn King said in an Oct. 9 speech that policy makers won't reduce the benchmark interest rate to shield banks from the credit slump.

While the bank's Monetary Policy Committee considered a cut at its Oct. 4 meeting, only David Blanchflower sought an immediate move, citing ``downside'' risks to economic growth. The majority of policy makers said that business surveys have ``stayed firm'' and there is little sign of weakening.

Inflation stayed below the bank's 2 percent target for a third month in September, giving policy makers scope to reduce the benchmark if growth slows. Annual gains in consumer prices, at a rate of 1.8 percent, matched the lowest since March 2006.

Of 18 economists surveyed Oct. 12 by Bloomberg News, 12 predict the bank will lower its rate by a quarter-point in February. Four expect a reduction in November.