+------------------------------------------------------------------------------+
U.K. Growth Sustains Surprise Momentum as S&P Spares AAA Grade
2010-10-26 11:38:22.59 GMT
By John Fraher and Svenja O'Donnell
Oct. 26 (Bloomberg) -- The U.K. economy grew more than
forecast in the third quarter and Standard & Poor's said the
nation no longer faces the risk of downgrade as pressure eases
on the Bank of England to add more stimulus.
S&P today restored its outlook on Britain's credit rating
to "stable" from "negative" after warning in May last year
that the nation's top AAA grade was at risk. Gross domestic
product rose 0.8 percent in the quarter through September after
climbing 1.2 percent in the previous three months, the Office
for National Statistics said in a separate report in London.
Prime Minister David Cameron's government plans to cut half
a million jobs to eliminate a budget shortfall that reached 11
percent of GDP last year. With the recovery persisting, JPMorgan
Chase & Co. today put back its forecast for further stimulus by
the Bank of England, whose officials have split three ways on
whether to add more aid.
"Clearly, aggressive fiscal consolidation plans and better-
than-expected growth this year have not gone unnoticed by the
rating agencies," Alan Clarke, an economist at BNP Paribas SA in
London, said in a telephone interview. The growth result "makes
any move on quantitative easing as early as November very
challenging, but we're still happy with our February forecast"
for an increase in stimulus.
The pound jumped 0.9 percent against the dollar today and
traded at $1.5870 as of 12:27 p.m. in London. The yield on the
benchmark two-year government bond was up 7 basis points today
at 0.702 percent.
'Vote of Confidence'
Chancellor of the Exchequer George Osborne said on Sky News
that the S&P move was a "vote of confidence" in the coalition
government in a "double dose of good news" for the economy.
The U.K. also has the top credit grades at Moody's Investors
Service and Fitch Ratings, both with a stable outlook. S&P had
previously said that Britain faced a one-in-three chance of a
downgrade because of its ballooning debt.
"The coalition parties have shown a high degree of
cohesion in putting the U.K.'s public finances onto what we view
to be a more sustainable footing," S&P said in an e-mailed
statement. "The ratings could come under downward pressure if,
against our expectations, the coalition's commitment to fiscal
consolidation faltered" to result in "a sustained increase in
the general government debt burden as a percentage of GDP."
Cameron yesterday pledged a "relentless focus on growth"
as the budget cuts announced last week by Osborne threaten to
derail the recovery and hurt the government's popularity.
Support for the Conservatives fell behind the Labour Party for
the first time in three years, the London-based Times reported
today, citing a poll by Populus.
Surprise Result
The GDP result is the second-fastest growth reading since
the first quarter of 2007, the statistics office said.
Economists predicted a 0.4 percent gain, according to the median
of 35 forecasts in a Bloomberg News survey.
Services, which make up 76 percent of GDP, grew 0.6 percent
on the quarter. Industrial production rose 0.6 percent, driven
by a 1 percent jump in manufacturing. Construction increased by
4 percent on the quarter and 11 percent on the year, which was
the fastest annual pace since 1988.
The data still show growth is slowing. Jobless benefit
claims rose the most in eight months in September, while Lloyds
Banking Group Plc's Halifax unit said house prices fell the most
on record. Retail sales unexpectedly dropped for a second month,
and mortgage approvals fell to the lowest in 1 1/2 years.
The U.K. central bank left its benchmark interest rate on
hold at a record low of 0.5 percent this month and kept its
asset-purchase program at 200 billion pounds ($317 billion).
BOE Split
Minutes of the bank's decision this month show U.K.
officials were leaning toward making further emergency bond
purchases to shore up the recovery. Seven of the bank's nine
policy makers voted for no change, Adam Posen favored more bond
purchases and Andrew Sentance opted for an interest-rate
increase. Inflation stayed at 3.1 percent in September,
exceeding the government's 3 percent limit for a seventh month.
It's a "very close call," said Ross Walker, an economist
at Royal Bank of Scotland Group Plc in London and the only
respondent in the GDP survey to correctly predict the 0.8
percent result. "We're sticking with our call for more QE." He
predicts the bank will add 50 billion pounds next week.
JPMorgan today pushed back its call for the Bank of England
to increase its so-called quantitative easing plan to February,
from an earlier forecast of November. Other economists say that
the growth data mean there is now no chance that officials will
add stimulus next week.
Tinsley's View
"I never thought that it was likely in any case, and this
rules it out entirely," said David Tinsley, an economist at
National Australia Bank in London and a former Bank of England
official. "They'll be quite hard pressed to get a consensus on
expanding QE if the economy is expanding at these rates."
Bank of England policy makers will consider whether to buy
more bonds at their decision on Nov. 4, a day after the U.S.
Federal Reserve may increase stimulus at own policy meeting.
"The GDP numbers have put paid to any chance of the BOE
reviving QE in November, but we still feel further monetary
support will be needed," said Jonathan Loynes, chief European
economist at Capital Economics Ltd. in London. "We had been
wavering between February and November, and now we'll probably
go for another 50 billion pounds in February."
For Related News and Information:
On the Bank of England: NSE BANK OF ENGLAND <GO>
--With assistance from Jennifer Ryan and Scott Hamilton in
London. Editors: Craig Stirling, Fergal O'Brien
To contact the reporters on this story:
John Fraher in London at +44-20-7673-2058 or
jfraher@bloomberg.net;
Svenja O'Donnell in London at +44-20-7673-2287 or
sodonnell@bloomberg.net
To contact the editor responsible for this story:
John Fraher at +44-20-7673-2058 or
jfraher@bloomberg.net
