UPDATE 2-UK recession risk persists, current account gap soars

Wed Mar 27, 2013 11:02am EDT

By Olesya Dmitracova and Kate Holton

LONDON, March 27 (Reuters) - Britain looks headed for recession and its current account deficit last year was the worst since 1989, data showed on Wednesday, dimming government hopes of a growth boost from exports and investment.

The Office for National Statistics confirmed that gross domestic product dropped 0.3 percent in the October-December period compared with the previous quarter, dragged down by sharp falls in industrial production and exports.

Separate data showed Britain's current account deficit came in at 14.037 billion pounds ($21.3 billion) in the fourth quarter, overshooting forecasts.

For the full year, the gap between what Britain earns from trade and foreign investment and money flowing out of the country almost tripled to a shortfall of 57.679 billion pounds or 3.7 percent of GDP - the highest share of output since 1989.

The pound slipped against the dollar after the two releases.

"The long-awaited rebalancing of the economy remains elusive. The consumer has once again bailed out underperforming exports and business investment," said Andrew Goodwin, economic adviser at Ernst & Young.

"Prospects for Q1 remain on a knife edge," he added.

An economic contraction in the first quarter of 2013 would tip Britain into its third recession in less than five years.

Economists say that a long spell of cold weather may be adding to the chances of a new recession because snowfall in many areas probably curtailed shopping and may have disrupted some supply chains and staffing levels at companies.

So far, however, voters have shown a slight preference for the Conservative-led government's economic acumen over those of the opposition Labour party.

CONSUMERS TO THE RESCUE

Wednesday's figures showed that the household saving ratio fell to 6.7 percent in the fourth quarter. Britons' disposable income shrank 0.1 percent in real terms, but household spending held up, rising 0.4 percent and boosting the economy.

By contrast, the steepest decline in industrial output since early 2009 and a fall in exports weighed heavily on GDP.

Weak exports combined with resilient imports were behind the deterioration in Britain's current account position last year, which was also hit by a sharply smaller surplus on its net income account.

"The current account figures ... make for very dismal reading," said Monument Securities economist Marc Ostwald.

"The UK is running a twin deficit of the same sort of order as some of the worst offenders in the euro zone, so the idea that sterling is a safe haven should be under a lot of question," he added.

Michael Saunders, economist at Citi, attributed the current account gap also to a switch by British investors out of higher-yielding, riskier bonds and into safer but lower-returning debt during 2012. A slowdown in many European economies also hurt income from Britain's foreign direct investment.

The first estimate of first-quarter GDP due on April 25 will reveal whether Britain is in another recession.

Data from the first quarter of 2013 has been mixed so far: there was a sharp fall in manufacturing output in January but stronger survey evidence on the dominant service sector in February.

The ONS is due to publish its index of services data for January on Thursday, helping economists to gauge the economy's performance at the start of the year.

Latest forecasts by the independent Office for Budget Responsibility, used by the government for its budget, showed last week that Britain will eke out a meagre 0.6 percent growth this year - half what it predicted only a few months ago.

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