The U.K. economy barely grew in the second quarter, suggesting the Bank of England will continue to keep rates at a record low to boost a flagging recovery. Gross domestic product rose 0.2 percent from the first quarter, when it increased 0.5 percent, the Office for National Statistics said today. That matched the median forecast of 32 economists in a Bloomberg News survey. Manufacturing output fell 0.3 percent. Excluding factors such as the impact on production from the Japanese earthquake and the extra public holiday for the royal wedding, the economy could have grown as much as 0.7 percent, the statistics office estimates. The pound jumped against the dollar after the report. Prime Minister David Cameron yesterday said Britain is facing a “difficult” recovery as budget cuts bite. Consumers are spending less as the fiscal squeeze undermines confidence and inflation erodes incomes at the fastest pace since the 1970s. Bank of England officials said this month the economic weakness may persist “for longer than previously thought.” “The figures are a relief rather than a triumph,” said Alan Clarke, chief U.K. economist at Scotia Capital in London. “We’ve seen a stellar bounce back in services and that’s what rescued us, but it’s a fairly pedestrian pace of economic growth.” The pound surged as much as 0.5 percent against the dollar after the report. It traded at $1.6378 as of 10:21 a.m. in London, up 0.6 percent since yesterday. Weather Impact From a year earlier, the economy expanded 0.7 percent, the least since the first quarter of 2010. Overall industrial production fell 1.4 percent in the second quarter, depressed by a 6.5 percent drop in mining and quarrying and a 3.2 percent decline in utilities’ output. The statistics office said energy output may have been reduced due to warm weather in April. Services made the biggest contribution to growth in the quarter, according to the statistics office. They rose 0.5 percent, with hotels and restaurants recording a 2.2 percent increase. The ONS said there is “some evidence” that the additional public holiday for the royal wedding boosted the industry. Chancellor of the Exchequer George Osborne hailed the figures as “positive news” and said Britain is “a safe haven in the storm” amid international instability. Abandoning his deficit-reduction plan, as demanded by the opposition Labour Party, “would only risk British jobs and growth,” he said in a statement released by the Treasury in London. No ‘Plan B’ Business Secretary Vince Cable said there was no need for a “Plan B” to kick-start the economy. “We’ve had growth,” he told reporters in London. “Clearly it’s not spectacular. But I’m not surprised by that when you see where we’ve come from.” Seven of the Bank of England’s nine-member Monetary Policy Committee, led by Governor Mervyn King, voted to keep the benchmark interest rate unchanged at 0.5 percent this month, saying that recent developments “reduced the likelihood that a tightening in policy would be warranted in the near term.” One official wanted more stimulus and two favored a rate increase. “We have to welcome the fact we haven’t slipped back into recession,” former Bank of England Deputy Governor Howard Davies said in an interview with Francine Lacqua on Bloomberg Television’s “The Pulse” today. Still, “it still feels rather gloomy because it’s well below the trend growth rate” and “if I was the Bank of England, I would hold my hand at this point.” Interest-Rate Bets Investors have pushed back bets on the first increase to beyond June 2012, data from Tullett Prebon Plc on forward contracts for the sterling overnight interbank average show. The benchmark has been at 0.5 percent since March 2009. The slowdown in growth may add to criticism of Cameron’s fiscal squeeze, the biggest since World War II. While Cameron and Osborne say the cuts are necessary to reduce the budget deficit, the Labour opposition has said they are too severe. “I want to get the deficit down, but not this fast,” Labour’s Treasury affairs spokesman, Ed Balls, said on BBC television last week. “It’s dangerous and reckless. We’re heading into a vicious circle.” Wolfson Microelectronics Plc, an Edinburgh-based maker of audio chips for smartphones, televisions and tablet computers, forecast yesterday that second-half revenue will be “flat” compared with a year earlier as consumer demand slows. “Our customers are being very cautious and waiting to see how things pan out,” Chief Executive Officer Mike Hickey said on a conference call as the company lowered its 2011 revenue- growth forecast to less than 10 percent. Incomes Squeeze While the U.K. economy is struggling to pick up, price growth continues to exceed the Bank of England’s 2 percent target. Inflation was 4.2 percent in June, and the central bank said last week that it was “likely” that it would exceed 5 percent in the coming months. The peak may be “a little higher and come sooner than the committee had previously expected,” officials said. In a separate report, the statistics office said services industries, which account for about three quarters of the economy, rose 1.6 percent in May from the previous month and were up 1.4 percent on the year. On a three-month basis, services increased 1.2 percent from the previous quarter. To contact the reporter on this story: Svenja O’Donnell in London at sodonnell@bloomberg.net To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

Source