UK struggles for growth, inflation shows surprise dip

Thursday, 14 July 2011 00:00 -     - {{hitsCtrl.values.hits}}

LONDON, July 12 (Reuters) - British inflation fell unexpectedly in June and the trade gap widened, pointing to more weakness in the economy and providing support to those in the Bank of England who want to keep interest rates at a record low.

Since the release of weak industrial output and construction data last week, economists have increasingly predicted very low growth or even contraction for the second quarter of 2011.

Tuesday’s trade and inflation data point to poor consumer demand for non-essentials and a failure of exports to keep pace with rising imports. Figures released overnight showing falling house prices and sluggish retail sales growth only strengthened this outlook.

The Office for National Statistics said consumer price inflation fell to 4.2 percent in June from a 2-1/2 year high of 4.5 percent in May, after the first drop in prices for a month of June since 2003.

Sterling fell and gilt futures extended gains after the inflation and trade numbers, as investors pushed expectations of a first post-financial crisis increase in interest rates towards the end of next year.

The figures are likely to bring some reassurance to BoE Governor Mervyn King, who has said repeatedly that the factors behind soaring prices are likely to be temporary, and warned on Monday that attempts to bring inflation down quickly could harm the economy.

Discounting of video games and other consumer electronics helped drive the fall, suggesting retailers are responding to weak demand. Mobile phone charges and insurance premiums also rose more slowly, and the core rate of CPI -- which excludes rising fuel and food prices -- eased to 2.8 percent, its lowest since November 2010.

“This might be the first real sign that the weakness of households’ spending power is starting to bear down on underlying price pressures in the high street,” said Jonathan Loynes of Capital Economics.

British consumers are scaling back spending as soaring prices, higher taxes and slow wage growth hit their budgets.

Europe’s second-biggest travel firm Thomas Cook warned on Tuesday its full year profit would be lower than expected, citing difficult conditions in Britain.

British inflation has been much higher than in other developed economies since the financial crisis -- partly due to sterling’s weakness and sales tax rises -- and economists still expect CPI to exceed 5 percent later this year.

Utility companies have cranked up prices for heating and energy, and further rises are in the pipeline. June’s data also showed a continued upward push from bread, meat and dairy prices, with food and drink costs rising at the fastest pace since May 2009.


Separate ONS data painted a gloomy picture of Britain’s net exports, which the government and Bank of England hope will help drive economic recovery in place of state and consumer spending.

The goods trade deficit widened unexpectedly in May to 8.48 billion pounds ($13.6 billion), casting doubt on the scale of net trade’s contribution to second-quarter GDP data due later this month. Economists had forecast a deficit of 7.37 billion pounds.

This deficit came as both exports and imports hit record highs. There were hefty imports of chemicals, while British exports of silver leapt.

The only bright spot was that some of the weakness may prove temporary, said David Tinsley, economist at National Australia Bank. British car exports appeared to still be disrupted by parts shortages after the Japanese tsunami, and the chemical imports were probably raw materials that would be used for products to be exported in future months.

Nonetheless, most economists said the trade deficit was a bad sign for GDP in Q2 at least, even though the data do not feed directly into the ONS’s initial growth estimate.

“The net trade performance was the one bright spot of the UK economy in the first quarter as it added an exceptional 1.4 percentage point to overall GDP growth of just 0.5 percent,” said Howard Archer, economist with IHS Global Insight in London.

“The weakened trade performance in May adds to concerns that the UK economy saw minimal growth at best in the second quarter.” ($1 = 0.624 British Pounds)