UK succumbs to first double-dip recession since 1970s
The UK economy shrank in the first quarter as Britain slid into its first double-dip recession since the 1970s, forcing Prime Minister David Cameron to defend his spending cuts in Parliament.
Gross domestic product fell 0.2 per cent from the fourth quarter of 2011, when it declined 0.3 per cent, the Office for National Statistics said today in London. The median of 40 estimates in a Bloomberg News survey was for an increase of 0.1 per cent. A technical recession is defined as two straight quarters of contraction.
As an anti-austerity backlash gains ground in Europe, Cameron described the data as “disappointing” and pledged to support growth without backtracking on the UK's biggest fiscal squeeze since World War II. The Bank of England is in the final month of its latest round of economic stimulus and the drop in output comes as prospects dim in the euro region, Britain's biggest export market.
“This isn't supportive of the fiscal consolidation program, so the government is likely to be concerned about that,” said Philip Rush, an economist at Nomura International in London. “The data were bad, and that supports the view that the Bank of England will do a final 25 billion pounds of quantitative easing in May.”
Bank of England policy maker David Miles had signaled yesterday that today's result was possible, saying in an interview with Bloomberg News that a negative number “wouldn't be a great surprise.”
UK 10-year gilts advanced immediately after the data were published before easing again. The yield rose 3 basis points to 2.123 per cent as of 1:12 p.m. in London. The pound fell as much as 0.4 per cent, then pared its decline to $US1.6116.
From a year earlier, the economy was unchanged in the first quarter. The median estimate in a Bloomberg survey of 31 economists was for 0.3 per cent growth from a year earlier.
The quarterly drop in GDP was due to a 3 per cent slump in construction, the most since the first quarter of 2009, and a 0.4 decline in industrial production. Manufacturing contracted 0.1 per cent and services, the largest part of the economy, expanded by 0.1 per cent, boosted by transport, storage and communication.
The data contrasts with a report today showing confidence among manufacturers rose to the highest level in two years this month. The Confederation of British Industry's quarterly gauge of factory optimism surged to 22 from minus 25 in January.
Separate surveys this month showed that growth in services, manufacturing and construction accelerated in March. The British Chambers of Commerce said the GDP data is likely to be revised higher by the statistics office.
Surveys “have shown a more positive picture, and we believe these give a more accurate indication of the underlying trends,” Chief Economist David Kern said in a statement today. “We think it is likely that the preliminary estimate will be revised upwards when more information is available.”
The FTSE 100 index rose 0.1 per cent today. Still, its 2.6 per cent advance this year trails the 4.9 per cent increase by Europe's Stoxx 600 Index.
Rising energy prices, government spending cuts and anemic wage growth are squeezing UK consumers, creating a drag on the recovery. Pay growth slowed to 1.1 per cent in the three months through February, less than a third of the inflation rate. An extra public holiday in June to mark Queen Elizabeth II's 60 years on the throne may also depress economic output in the second quarter.
Britain, the first Group of Seven country to report output for the first quarter, was hit hard by the financial crisis that erupted in 2007 and GDP is still 4.3 per cent below its pre- recession peak in early 2008. Only Japan and Italy are further behind among G-7 nations.
The last time Britain experienced a double-dip recession, defined as consecutive quarterly drops in GDP before the economy had recovered output lost in the previous recession, was 1975. That year, Labour Prime Minister Harold Wilson was in office and Margaret Thatcher was elected leader of the opposition Conservatives. UK Treasury forecasters and the International Monetary Fund predict the economy will grow 0.8 per cent this year, the same as last year.
The data are “very, very disappointing,” Cameron said in Parliament today, adding that “I don't seek to try and excuse them. There is no complacency at all.” He pledged to stick to his deficit-cutting plans, saying “the solution to a debt crisis cannot be more debt.”
Chancellor of the Exchequer George Osborne said the UK's economic situation is “very tough” and the government shouldn't waver on its fiscal plans, which are aimed at eliminating most of the deficit by 2017.
“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 in a statement.
Their Conservative Party has lost public support over last month's budget, which voters say helped the rich at the expense of pensioners and charities, and the handling of a threatened strike by tanker-truck drivers. The Labour opposition led the Tories by 41 per cent to 33 per cent in an ICM Ltd. poll published yesterday.
In addition to the domestic budget squeeze, Britain's recovery is being hampered by unfavorable export conditions.
Euro-area services and manufacturing output declined for a third month in April as the economy struggled to rebound from a fourth-quarter contraction, according to a report on April 23. Confidence among executives and consumers in the economic outlook in the region fell this month, economists in a Bloomberg survey said before data tomorrow.
The economy may get little further help from the Bank of England, whose officials have suggested inflation may retreat less quickly than they forecast two months ago. Only Miles on the nine-member Monetary Policy Committee sought an expansion in emergency stimulus this month. He said yesterday in an interview with Bloomberg News that voting for more bond purchases was “still the right strategy.”
In Asia, all 14 economists in a Bloomberg News survey predict additional easing when the Bank of Japan releases new inflation forecasts on April 27. Most expect an increase ranging from 5 trillion yen ($US62 billion) to 10 trillion yen.
The U.S. Federal Reserve will release its policy statement at around 12:30 p.m. today in Washington, and its forecasts for interest rates, growth, inflation and unemployment at 2 p.m. Policy makers will probably repeat their plan to keep the benchmark rate low at least through late 2014, economists say.