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U.K. Economy Avoids Contraction Amid Post-Election Bounce

Gross domestic product was unchanged from the third quarter.

U.K. Economy Avoids Contraction Amid Post-Election Bounce
Pedestrians pass a newsstand along O’Connell Street Lower in Dublin, Ireland. (Photographer: Hollie Adams/Bloomberg)

(Bloomberg) --

The U.K. economy narrowly avoided a contraction in the fourth quarter, adding to evidence of a pickup following Boris Johnson’s election win.

Gross domestic product was unchanged from the third quarter, as forecast by economists in a Bloomberg survey. December alone saw output rise a stronger-than-forecast 0.3%. The pound gained as much as 0.2% after the report and was trading at $1.2929 as of 9:32 a.m. in London.

Signs of a revival since Johnson’s December election victory convinced the Bank of England not to cut interest rates last month, though uncertainty is expected to persist.

U.K. Economy Avoids Contraction Amid Post-Election Bounce

Johnson, who honoured his election promise to take Britain out of the European Union on Jan. 31, now faces potentially fraught talks with the EU on a new trade deal. He has until the end of the year to reach an agreement or Britain will once again be facing a disruptive break with its biggest trading partner.

BOE policy makers see the economy growing less than 1% this year -- the weakest pace since the financial crisis. Growth in 2019 picked up modestly to 1.4%.

Confusion gripped the economy in the fourth quarter as Britain missed a second deadline to leave the EU - on Oct. 31 - and Johnson was forced to hold a general election in December to break the parliamentary deadlock.

Consumer spending rose just 0.1%, the least since the end of 2015, and Business investment fell 1% -- the biggest drop since the end of 2016. Growth in the dominant services industry slowed to a crawl and manufacturing shrank for a third straight quarter.

What Our Economists Say:

“Taken at face value, the fourth quarter U.K. GDP figures are poor. But on closer inspection they suggest the economy carried momentum into 2020. We expect growth to improve this year -- forward looking indicators point to a sharp rebound in confidence since Prime Minister Boris Johnson’s election victory. That should be enough to keep the Bank of England on hold.”

Dan Hanson, Bloomberg Economics. Click here for the full U.K. REACT

The economy got some support from net trade as exports jumped. Inventories also contributed to growth, as did government spending, which posted the biggest increase since 2012 in a further sign that austerity is ending.

In November, car factories shut down to deal with potential Brexit disruptions and there were signs of limited destocking of goods built ahead of the deadline.

These effects were reversed in December, with manufacturing and services industry both rising 0.3%. Construction output also gained.

Signs are the momentum gathered pace in January, and economists predict growth of around 0.3% for the first quarter with an expected fiscal stimulus helping support the economy later in the year.

Britain posted an unexpected trade surplus in December, though this was driven by flows of non-monetary gold. The deficit excluding gold and other precious metals narrowed to 7.2 billion pounds ($9.3 billion).

To contact the reporter on this story: Brian Swint in London at bswint@bloomberg.net

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

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