British 1Q GDP and Current Account

June 28, 2011

U.K. real GDP rose 0.5% in the first quarter.  This rounded rate of growth according to the second revision of the national income accounts was the same as calculated previously, but the on-year rate was revised downward to 1.6% from 1.8%.  Personal consumption, business final capital fixed investment, and inventories made negative contributions to the quarterly growth rate.  Government spending increased at a faster rate than last autumn but was only 1.1% greater than in the first quarter of 2010.  The predominant growth engine in 1Q11 was net exports.  Gross exports advanced 2.4%, imports dropped 2.4%, and net foreign demand enhanced GDP by 1.4 percentage points, which was more than the 1.2 percentage point contribution from this demand component to on-year GDP growth between 1Q10 and 1Q11.

Britain has done little better since last summer than an economy in recession.  According to market gospel, a recession occurs when an economy suffers at least two consecutive quarters of negative growth.  Britain did the next worst thing, falling 0.5% in 4Q10 and then recovering that loss but not more in 1Q11.  Having zero growth in those sequential quarters would have produced the same result. 

The U.K. was also late emerging from the great recession.  The first positive quarter did not occur until the final quarter of 2009.  Over that and the five ensuing quarters, six periods in all, real GDP advanced 2.5% or 1.7% at an annualized pace.  That’s weaker than Japan’s 2.2% annualized six-quarter pace even though Japan did experience sequential contractions in 4Q10 and 1Q11.  British growth over the last six reported quarters also compares unfavorably with Euroland’s annualized 2.1% and America’s 3.0% pace.  Besides a relatively sluggish recovery, Britain has comparatively high inflation including on-year gains of the GDP deflator of 3.1% in the final quarter of 2010 and 2.9% in the first quarter of 2011.  The U.K.’s fiscal policy has been tightened sharply, making the Bank of England’s policy dilemma all the more acute.

The British current account deficit of GBP 9.4 billion in the first quarter of this year equaled just 2.5% of GDP, down a full percentage point from the prior quarter and below the full-2010 deficit that amounted to 3.2% of GDP.  The first quarter saw a merchandise trade deficit of GBP 22.2 billion (5.9% of GDP) augmented by net transfer payments of GBP 5.5 billion (1.5% of GDP).  These outflows were mitigated by a surplus in traded services of GBP 13.8 billion, or 3.7% of GDP, and net investment income equal to GBP 4.59 billion (1.2% of GDP).  In the severe recessionary year of 2009, Britain’s current account deficit narrowed to 1.7% of GDP.

Copyright Larry Greenberg 2011.  All rights reserved.  No secondary distribution without express permission.



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