UK economy shrinks 0.8%

Author: Reuters

GDP fell 0.8 per cent in the three months to June and by 5.6 per cent lower on
the year, the steepest yearly fall since similar records began in 1955,
official data showed on Friday as Britain became the first G7 country to
report Q2 data.

“These are awful, awful numbers,” said Ross Walker, UK economist at RBS
Financial Markets. “It casts doubt on whether we will actually see growth in
Q3.”

Many analysts had been confident of a return to growth later this year and
sterling fell more than half a cent and gilt prices rose as investors bet
the recovery could take longer and the Bank of England might add more
stimulus to the economy.

“We would still tend to the view that the economy will expand in the second
half of the year but these figures introduce some uncertainty to that
outlook,” said Philip Shaw, chief economist at Investec.

The UK economy has now shrunk for five consecutive quarters with a cumulative
decline of 5.7 per cent – more than double the drop seen in the early 1990s
recession and not far off the 6.0 per cent contraction experienced in early
1980s.

Analysts said government forecasts of the economy shrinking by around 3.5
percent this year – which would be the worst outturn since the Second World
War – were looking very optimistic, putting more pressure on strained public
finances.

“For this to now happen would require a remarkable bounce-back in the second
half of the year with growth of around 1.5 percent in each of the remaining
two quarters,” said Richard Snook, senior economist at the Centre of
Economic and Business Research.

Treasury minister Liam Byrne said that at least the figures showed the pace of
decline was easing – GDP shrank by 2.4 percent in the first quarter – and
that he was “cautious but confident that growth will return towards the end
of the year.”

ELECTION WOES

Prime Minister Gordon Brown desperately needs an economic turnaround before an
election expected in May 2010 as his Labour Party is languishing in the
polls.

But analysts warned that even if the economy starts to grow again, it may be a
while before it picks up any real momentum and hundreds of thousands jobs
could still disappear as more and more companies struggle to make ends meet.

A breakdown of the figures showed business services and finances, a sector
that has boomed for much of the last decade, accounted for more than a
quarter of the Q2 GDP decline.

“Recent hopes of recovery have run ahead of reality. With credit still
severely restricted, consumers and businesses continuing to retrench and
world trade yet to pick up, it is hard to see any grounds for sustained
optimism,” said Hetal Mehta, senior economic adviser to Ernst and Young.

The Bank of England has already cut interest rates to a record low of 0.5
percent and has pumped close to 125 billion pounds of new money into the
economy in order to pull the country out of recession and get lending going
again.

Policymakers will now debate next month whether even more stimulus is needed.
The jury remains out on whether the BoE will choose to expand the scope of
its asset-buying programme of mostly gilts when the £125 billion total is
completed.

“It is still likely to be a long hard slog to get the economy back on track.
Accordingly, we think that it is premature to conclude that the BoE’s
quantitative easing programme has already come to an end,” said Vicky
Redwood, UK economist at Capital Economics.

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