UK economy grows at fastest rate in six years in 2013

Reuters
A woman passes a new coffee shop to be opened in London
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A woman passes a new coffee shop to be opened in London October 25, 2013. REUTERS/Luke MacGregor

By David Milliken and Andy Bruce

LONDON (Reuters) - Britain's economy grew last year at its fastest rate since the financial crisis, official data showed on Tuesday, raising questions about how long the Bank of England can keep interest rates at a record low.

Barring construction and oil and gas extraction, all major sectors of Britain's economy expanded in the final three months of 2013, concluding its best showing since 2007, the Office for National Statistics said.

The economy grew 0.7 percent quarter-on-quarter from October through December, in line with forecasts for that pace to ease from 0.8 percent in the third quarter. Growth for the full year rose to 1.9 percent.

That was a vast improvement over 2012's 0.3 percent. It bodes well for the coming 12 months and should improve the government's standing just over a year before a national election.

The data also led to more speculation about when the Bank will raise rates. Such speculation was already being fuelled by a steep drop in unemployment towards the 7 percent threshold at which the bank has said will consider the future direction for monetary policy.

"We forecast the Bank will start hiking in Q2 2015, given the strong turnaround in the economy and labour market," said Blerina Uruci, economist at Barclays. "A hike as soon as 2014 would be premature in the current environment of subdued inflation pressures and would risk choking off the recovery."

A Reuters poll of economists last week showed a 30 percent chance the Bank will hike rates from their record low 0.5 percent this year.

The fourth-quarter data's failure to beat forecasts - as some private-sector surveys had indicated it might - caused sterling to slip briefly, by reducing short-term pressure on the Bank to consider tighter policy.

Bank Governor Mark Carney has said there is no need for rates to rise anytime soon, and the Bank itself had forecast fourth-quarter growth at just under 1 percent.

Britain's total output is still 1.3 percent below the pre-financial crisis peak - a weaker performance than other big, advanced economies. Inflation has fallen to the BoE's 2 percent target for the first time in four years.

But unemployment has fallen far faster than the bank forecast in August, raising the prospect that long-term inflation pressures might be building in the economy.

HAPPIER DAYS

A string of economic indicators over the past few months suggested Britain's economy was recovering faster than either policymakers or independent forecasters had predicted. And data the Confederation of British Industry released earlier on Tuesday suggest 2013's strong growth continued into January.

The growth figures were a boon for Britain's coalition government. Opinion polls for the 2015 election suggest the Conservative-led government still lags behind the Labour opposition, which says Britons have been hurt by the rising cost of living.

"Growth is broadly based, with manufacturing growing fastest of all," Chancellor George Osborne said after the data. But Ed Balls, Labour's finance spokesman, said it was no recovery for working people facing a cost-of-living crisis.

Output in Britain's service sector - which makes up more than three-quarters of GDP - rose by 0.8 percent in the fourth quarter, maintaining its pace from previous months, which was the fastest in a year.

But industrial output growth slowed to 0.7 percent from 0.8 percent. The strongest manufacturing growth since the third quarter of 2010 was not enough to offset falling North Sea oil and gas output.

Construction - which accounts for less than 8 percent of GDP - fell by 0.3 percent, reflecting a weak November.

So far, the recovery has been fuelled by consumer spending and an upturn in the housing market, although Bank policymakers over the last week have said they expect business investment to begin making a contribution later in the year.

Critics of the government's economic policies say its attempts to revive the housing market will not help bring about the long-hoped for rebalancing of Britain's economy towards more manufacturing and exports.

The ONS's preliminary estimates of GDP are among the first in the European Union, and are based partly on estimated data. On average, they are revised by 0.1-0.2 percentage points by the time a third estimate is published two months later.

(Editing by Larry King)

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