25 April 2012

UK slips into recession after GDP fell for 2 consecutive quarters - Office for National Statistics

The U.K. slid back into recession in the first quarter of 2012, dealing a fresh blow to Prime Minister David Cameron's governing coalition and complicating its efforts to fix the nation's public finances.

The Office for National Statistics said Wednesday gross domestic product shrank 0.2% in the three months to March compared with the final quarter of 2011, when output shrank 0.3%. Production in the first quarter was flat compared with the same quarter a year earlier.

The figures underline the difficulties faced by European governments in sustaining growth while cutting their large budget deficits, as well as the lasting impact of the financial crisis through the restricted availability of credit to businesses and households.

The ONS said that GDP remains 4.3% below its pre-crisis peak in the first quarter of 2008. And the economy has expanded by just 0.4% since the coalition government took power after elections in May 2010, and immediately embarked on its austerity program.

"This is the worst recession/recovery cycle of the last 100 years," said Michael Saunders, an economist at Citigroup.

The U.K. is the eleventh European Union member country to have entered recession. Nine of those were in recession in the fourth quarter of last year, and have yet to release figures for the first. The U.K. has been joined by Spain in entering recession in the first quarter and official data may well show others have followed suit.

Sterling fell sharply against other currencies after the release of the data, while U.K. government bond prices rose.

A recession is technically defined by many economists as two consecutive quarters of economic contraction.

The U.K. last entered recession at the height of a global banking crisis in 2008, and emerged from it in the third quarter of 2009 after five successive quarters of economic contraction.

The ONS said the fall in output in the first quarter was driven by a slump in construction and weakening industrial production. Construction-sector output contracted 3.0% in the first quarter--its biggest quarterly decline since the first quarter of 2009--and industrial production activity fell 0.4%.

The U.K.'s dominant services sector eked out growth of just 0.1%, the ONS said.

Recession's return will provide fresh ammunition to opponents of Finance Minister George Osborne's austerity drive, an aggressive program of tax rises and spending cuts aimed at closing a persistent budget deficit that critics say will strangle growth.

But Osborne said Wednesday he won't ditch his austerity plan.

"The one thing that would make the situation even worse would be to abandon our credible plan and deliberately add more borrowing and even more debt," he said.

Speaking to business leaders at the Institute of Directors' annual conference, Deputy Prime Minister Nick Clegg said the figures were "disappointing."

"People will have questions about what these figures mean for the U.K.," he said. "But I believe our answers are the right ones to repair the damage done and create growth for the long term. [This is] not easy, but right."

Renewed recession will also leave the U.K. economy with some way to go in 2012 to meet the growth forecasts of the International Monetary Fund and the Office for Budget Responsibility, an independent outfit that provides the government with economic forecasts, which both predict the economy will expand 0.8% this year.

The Bank of England has already signaled it thought a return to recession was possible, and rate-setters have been making the case that the economy is actually healthier than the official data suggest.

The BOE has paid particular attention to the gap between official figures and surveys, with the latter painting a much brighter picture of economic growth.

Markit Economics, which compiles the widely followed purchasing managers indices for the manufacturing, construction and services sectors, said its surveys suggest the economy grew by 0.5% in the first quarter.

It pointed out that when the ONS released its first estimate of GDP growth in the third quarter of 2009, it recorded a contraction of 0.4%, while the PMIs pointed to growth. The ONS subsequently revised its estimate for the period to show growth of 0.2%.

"As was the case three years ago, there is therefore a worry that by heralding a double-dip recession, misleading, gloomy official data shatter the revival of consumer and business confidence seen so far this year, and could even drive the economy back into a real recession," said Chris Williamson, chief economist at Markit.

A survey of manufacturers also released Wednesday highlighted the conflict between official data and other evidence, with the Confederation of British Industry reporting that more manufacturers expect their output to rise than fall over the next three months.

"This disappointing news comes as something of a surprise," said John Cridland, the CBI's director-general. "Since the turn of the year, business confidence has improved and, while still challenging, underlying economic conditions also appear to have strengthened."

Source: online.wsj.com TheWallStreetJournal


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