February 26, 2014 / 9:47 AM / 6 years ago

UK recovery broadens, helped by long-awaited investment

LONDON (Reuters) - Britain’s economic recovery broadened in the last three months of 2013, driven by a pick-up in business investment and trade that will hearten the Bank of England and the government.

Britain's Chancellor George Osborne holds a pint of beer during a visit to officially re-open The Red Lion pub, following a major refurbishment in Westminster, London, February 25, 2014. REUTERS/Kirsty Wigglesworth/Pool

Consumer spending and a turnaround in the housing market have been the main drivers behind Britain’s surprisingly rapid upturn, which started last year.

But Wednesday’s data suggested a more balanced recovery may be building, little more than a year before a general election.

Gross domestic product rose by 0.7 percent in the fourth quarter, the Office for National Statistics said, unrevised from an earlier estimate and in line with forecasts.

That capped off the fastest rate of full-year growth since the financial crisis.

“This provides some hope that the recovery is gaining breadth even if, as we expect, overall growth slows during the course of this year,” Deutsche Bank economist George Buckley said.

Sterling rose against the dollar to a session high above $1.67 after the data.

Business investment rose 8.5 percent in the fourth quarter compared with a year earlier, the fastest upturn since the first quarter of 2012. Household spending rose 0.4 percent on the quarter.

Net trade also contributed strongly to growth.

Britain’s Treasury highlighted the growth in business investment, saying it was a sign that the government’s economic plan was working.

But a spokesman said more needed to be done and next month’s budget would seek to support investment and exports.

Revisions to the data showed business investment grew for four consecutive quarters for the first time since 2007.

BoE Governor Mark Carney has previously questioned the reliability of the ONS’s business investment data, saying other surveys had suggested stronger growth in spending by companies.

The central bank has said it expects a pick-up in business investment in 2014, something it sees as essential to secure long-awaited growth in productivity.

The BoE has linked its record low interest rates to the amount of spare capacity in the economy.

Policymakers have stressed the economy will not be weaned off the stimulus of ultra-low borrowing costs quickly. Monetary Policy Committee member David Miles said on Wednesday rates will not rise, despite what appears to be the brightest economic outlook in five years.

Another BoE policymaker Ian McCafferty, said in a Reuters interview published on Tuesday that expectations the BoE will start to raise interest rates in the spring of 2015 are “not unreasonable”.

Wednesday’s data took Britain’s full-year growth for 2013 up to 1.8 percent, from just 0.3 percent the year before. This is the highest since 2007, although total output is still 1.4 percent below the pre-financial crisis peak reached in the first three months of 2008 - a weaker situation than in almost all other big advanced economies.

Economists polled by Reuters expect the pace of quarter-on-quarter growth to be sustained at around 0.6 percent through this year, taking full-year growth to around 2.6 percent.

Business surveys have suggested the momentum behind the recovery has largely carried through into the first months of 2014.

In the fourth quarter, net trade contributed 0.4 percentage points to growth after being a drag in the third quarter.

Output in Britain’s service sector - which makes up more than three quarters of GDP - rose by 0.8 percent in the fourth quarter, the same rate of growth as in the third quarter.

Industrial output was 0.5 percent higher, while construction - which accounts for less than 7 percent of GDP - expanded by 0.2 percent.

Writing by Andy Bruce; Editing by Catherine Evans

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