Instant View - Q4 GDP much weaker than expected

LONDON (Reuters) - Britain came out of recession in the fourth quarter of 2009, but only just and at far weaker growth rate than expected, official data showed on Tuesday, highlighting the economy still remains fragile.

Most analysts predict the Bank of England to halt its 200 billion pound asset buying programme next month but these figures are likely to boost expectations that any monetary policy tightening is still some way off.

While news that Britain is finally out of recession may boost consumer confidence, the sluggish recovery is still likely to weigh on Prime Minister Gordon Brown's chances of winning a parliamentary election expected in 100 days.

KEY POINTS

- First rise in QQ GDP since Q1 2008. The ONS said the peak to trough fall in output between Q1 2008 and Q3 2009 was 6.0 percent, much greater than that seen in the recessions of the early 1980s and 1990s.

- The ONS said overall GDP fell 4.8 percent in 2009, the biggest fall since records began in 1949.

- The ONS said the increase in output was mainly due to increases in distribution, hotels and restaurants and government

and other services.

ANALYSTS' COMMENTS:

DAVID TINSLEY, NAB GROUP

"While it's good news that the UK is out of recession it is clear the economy is not out of the woods yet. Most imminently we will need to see a further sustained expansion in the first quarter of 2010 to assuage concerns that the weak fourth quarter was not artificially boosted by things such as a rush to beat the VAT hike and the car scappage scheme.

"It's not impossible to imagine the first quarter returning to negative growth on the basis of today's data. And further out, the economy has to pick its way across the minefield of consumer deleveraging, constrained bank balance sheets and the forthcoming squeeze of public sector spending.

"So the short-term data fog in the UK will probably exist until Easter, and beyond with a likely General Election by May. And further out there are severe headwinds to the UK being able to sustain a decent expansion across the next few years. Against that background we do not expect the MPC to be raising Bank Rate until the end of 2010."

HOWARD ARCHER, IHS GLOBAL INSIGHT

"Serious economic and financial obstacles stand in the way of significant, sustainable growth, and only marginal growth in the fourth quarter of 2009 reinforces our suspicion that recovery will be gradual and prone to losses of momentum.

"Only marginal GDP growth in the fourth quarter of 2009 reinforces our belief that the Bank of England will keep interest rates down at 0.50% until at least late-2010, and very possibly beyond, despite consumer price inflation likely temporarily spiking up to at least 3.5% in the early months of this year. Furthermore, the eventual increases in interest rates are likely to be limited to counter the restrictive impact of the tight fiscal policy that will increasingly have to be enacted from 2011/12. However, while we would not rule out further Quantitative Easing, we suspect that the Bank of England will be reluctant to do this unless the economy suffers a major relapse in 2010."

JONATHAN LOYNES, CAPITAL ECONOMICS

"The Q4 GDP figures are a major blow to hopes that the UK economy had emerged decisively from recession in Q4.

"No doubt some commentators will claim that the figures are under-estimating the true strength of the recovery and will be revised up in time. That it is certainly possible. But it won't change the big picture of an economy still operating way below both its pre-recession and trend levels of output.

"With household incomes under pressure, credit in short supply and a major fiscal squeeze looming, the path to a full recovery is going to be a long and bumpy one. We still expect average GDP growth of a below-consensus 1.0 percent or so in 2010. Further monetary policy support may be back on the agenda."

HETAL MEHTA, ERNST & YOUNG ITEM CLUB

"While the UK is now finally out of recession, the preliminary GDP estimate seems to be at odds with much more upbeat survey data. There do not appear to be obvious VAT effects in the retail figures, and the services sector in general is exhibiting particularly slow progress.

"There is a strong possibility that the Q4 figures will be revised up. Despite the significant policy stimulus, particularly on the monetary side, we still anticipate GDP growth of 1 percent this year."

ROSS WALKER, RBS FINANCIAL MARKETS

"These numbers are disappointing. The service sector is a big disappointment and the fact that two of the main private sector components were flat."

"The private sector is barely growing once you look beyond retail and distribution, and retail and distribution presumably suffers in Q1 because we've got the VAT hike kicking in. There would have been some bringing forward of purchases in Q4 so that is not going to be sustained."

"Obviously medium-term public sector service output is not going to be sustained so it is a worry."

"We know there are significant head winds in Q1 ... so overall the headline is disappointing but actually the underlying picture looks more worrying. You are not getting any sort of proper non consumer private sector growth."

PETER DIXON, COMMERZBANK

"The good news is it was up, the bad news is it was much weaker than expected. It's the 3rd consecutive downside surprise on GDP. These numbers are not consistent with the strength we're seeing in the survey data.

"As far as the future is concerned, I don't think it will impact significantly on the BoE's QE policy. It's probably reached the end of the road, but we may not get quite as definitive a comment on that in February as we'd have lived. They'll keep the door open but they're unlikely to continue their purchases."

JAMES KNIGHTLEY, ING

"Today's GDP numbers have confirmed that the UK has finally exited recession -- but barely.

"This is a woefully soft emergence from recession. At the moment lead indicators are pointing to a robust recovery with purchasing managers' indices consistent with GDP growth of 2-percent-plus in year-on-year terms. However, we are concerned that these are maybe a little optimistic. The recent retail sales numbers have disappointed, as has consumer confidence, while consumer fundamentals remain very poor. Indeed, household indebtedness remains at very high levels (160% of disposable income).

"Meanwhile household incomes are under downward pressure from a weak labour market and higher taxes. We look for gross disposable incomes to be flat in 2010, which means that there is the potential for consumer spending growth to stall unless we start to see the savings ratio decline once again.

"With government spending likely to end up contracting, this will place an immense burden on trade and investment to generate GDP growth. Fiscal consolidation will likely intensify over coming quarters whoever wins the general election and in a weak growth environment the likely result is that interest rates will be kept low to compensate. As a result, rather than seeing the Bank of England raise rates to 5-6 percent as in previous cycles, the eventual peak in UK rates this time round may be closer to 3-4 percent."

STEPHEN LEWIS, MONUMENT SECURITIES

"They are slightly disappointing. There was a very sharp drop in the output of electricity, gas and water for the quarter, which is slightly puzzling given that late November early December the weather was colder than normal. But I think that is probably an indication just how weak some of the off-take may be from companies.

Apart from that the service sector is looking fairly sluggish with the output of transport and of business services unchanged on the quarter."

DAVID PAGE, INVESTEC

"The UK economy has emerged from recession but in a slightly more lacklustre fashion than we'd hoped. Our chief query is with the still subdued pace of the services sector compared to the survey evidence and we continue to suggest that we may see upward revisions to GDP numbers in the past quarters."