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UPDATE 1-Britain sinks far deeper into recession than expected

by on July 25, 2012 9:14 am BST
 

Wed Jul 25, 2012 5:14am EDT


By David Milliken and Olesya Dmitracova

(Reuters) – Britain’s economy shrank far
more than expected in the second quarter of 2012, battered by
everything from an extra day’s holiday to budget austerity and
the neighbouring euro zone crisis.

Finance minister George Osborne said the country had
“deep-rooted economic problems”.

The Office for National Statistics said Britain’s gross
domestic product fell 0.7 percent in the second quarter, the
sharpest fall since early 2009 and a bigger drop than any of the
economists surveyed in a Reuters poll last week had expected.

The figures confirmed that Britain is mired in its second
recession since the financial crisis, with the economy shrinking
for a third consecutive quarter.

It will add pressure on Osborne to get the economy growing
again after a crisis that has left many Britons poorer as rising
prices and higher taxes ate up meagre wage increases.

Sterling hit its lowest in nearly two weeks against the
dollar after the data, and government bond prices rallied on
speculation that the Bank of England may have to provide more
economic stimulus than expected.

Earlier this month the BoE has announced another 50 billion
pound programme of gilt purchases with newly created money to
soften a grim economic outlook, but Wednesday’s data is likely
to add to market speculation that it may cut interest rates
later this year.

“This is terrible data. Frankly there’s nothing good that
comes out of these numbers at all,” said Peter Dixon, an
economist at Commerzbank.

“The economy looks to be badly holed below the water line at
this stage. It’s a far worse period of activity than we’d
expected.”

HEADWINDS

Economists had been expecting an extra public holiday to
mark Queen Elizabeth’s Diamond Jubilee to reduce output by
around 0.5 percent, so the latest figures suggest the economy is
also contracting on an underlying basis.

The ONS said it was too early to provide an estimate of the
Jubilee effect, but warned that this and very wet weather added
“uncertainty” to its calculation of economic activity towards
the end of the quarter.

Output in Britain’s service sector — which makes up more
than three quarters of GDP — contracted by 0.1 percent in the
second quarter after growing 0.2 percent in Q1 2012.

Industrial output was 1.3 percent lower, while construction
— which accounts for less than 8 percent of GDP — contracted
by 5.2 percent, its biggest drop since the first quarter of
2009.

Overall second-quarter GDP was 0.8 percent lower than a year
earlier, the biggest decline since the last three months of
2009.

Before Wednesday’s data, most economists expected a return
to growth in the third quarter, as the London Olympics offer a
one-off boost through ticket sales and visitors spending.

And some argue that increasing employment levels suggest the
economy is healthier than the headline GDP figures suggest.

But the overall outlook is poor. Last week the International
Monetary Fund slashed its growth forecast for Britain by more
than those for any other advanced economy, and warned the
government and BoE that they will need to rethink their approach
if the economy fails to pick up by early next year.

AUSTERITY

Eliminating Britain’s structural budget deficit over the
next five years is the central political goal of Britain’s
coalition of Conservatives and Liberal Democrats, but the
opposition Labour Party says the pace is too rapid.

Over the past month the coalition and BoE have announced
several measures to ease the flow of credit to households and
businesses, as the euro zone debt crisis saps demand in
Britain’s major export markets.

But for now, any change to the fiscal austerity programme is
opposed both by finance minister George Osborne and BoE Governor
Mervyn King, who fear it could trigger a loss of confidence in
Britain’s commitment to long-term deficit reduction.

“We’re dealing with our debts at home and the debt crisis
abroad. We’ve made progress over the last two years in cutting
the deficit by 25 percent and businesses have created over
800,000 new jobs,” Osborne said in a statement.

“But given what’s happening in the world we need a relentless
focus on the economy and recent announcements on infrastructure
and lending show that’s exactly what we’re doing.”