U.K. Economy Unexpectedly Shrinks Amid BOE Rate-Cut Debate

Andrew Atkinson and Lucy Meakin
U.K. Economy Unexpectedly Shrinks Amid BOE Rate-Cut Debate

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The U.K. economy unexpectedly shrank ahead of the general election, casting doubt over whether there was any growth at all in the fourth quarter.

The figures will add to concerns at the Bank of England, where officials are debating whether further stimulus is needed if economic weakness persists. Three policy makers, including Governor Mark Carney, have flagged the possibility of an interest-rate cut in the past week, sending the pound lower and sparking an increase in market bets on a move as soon as this month.

Gross domestic product fell 0.3% in November, missing forecasts for unchanged output on the month. It means growth of around 0.2% was needed in December to prevent the economy contracting in the fourth quarter.

The figures reflect caution in the run-up to the December election, with the dominant services industry contracting 0.3% -- the biggest decline since early 2018. Overall economic growth of 0.6% from a year earlier was the weakest since mid-2012.

The pound fell for a fifth day against the dollar, dropping as much as 0.8% to $1.2966. Gilts rose, led by shorter tenors, and five-year yields fell to the lowest since early December.

Carney said last week that the BOE has plenty of policy room to act if necessary, and officials Silvana Tenreyro and Gertjan Vlieghe warned they could join two other colleagues calling for cheaper borrowing costs. Markets have put about a 50% chance on a rate cut this month.

What Bloomberg’s Economists Say...

“Our central forecast is for uncertainty to ease, prompting a turnaround in the outlook for the economy that prevents the MPC from cutting in the near term. But we recognize this call hangs in the balance. Any downside surprises relative to our expectations would lead us to reconsider it.”

--Dan Hanson. Read the full REACT

BOE officials will have plenty of economic numbers to digest before announcing their next interest-rate decision on Jan. 30. This week sees the release of inflation data and retail sales, with unemployment figures due next week. There’s also Purchasing Managers Index for January, which will provide a snaphot of the economy at the start of 2020.

Surveys taken after December’s election suggest Prime Minister Boris Johnson’s emphatic victory delivered a sharp boost to confidence. The question is whether that momentum can be maintained.

Britain is due to leave the European Union at the end of the month, and many doubt Johnson can deliver on his pledge to strike a trade deal with the bloc by the end of the year. If he fails, Britain will once again be facing a disruptive cliff-edge Brexit.

Upward revisions to September and October meant the economy posted modest growth in the latest three months, though it was still the weakest performance since July. The National Institute of Economic and Social Research estimates that figures due on Feb. 11 will show the economy stagnated in the fourth quarter, with growth for 2019 as a whole little changed at 1.4%.

Manufacturing output fell 1.7% in November, partly reflecting car factories shutting down to avoid supply disruptions immediately following the now-postponed Oct. 31 Brexit deadline. Auto output alone fell more than 6%. The drop may also be due to some orders being brought forward to October. Construction output rose 1.9%, rebounding from a weak October.

(Updates with Niesr estimate in penultimate paragraph)

To contact the reporters on this story: Andrew Atkinson in London at a.atkinson@bloomberg.net;Lucy Meakin in London at lmeakin1@bloomberg.net

To contact the editors responsible for this story: Fergal O'Brien at fobrien@bloomberg.net, Andrew Atkinson, Brian Swint

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