UK Recession Deeper Than Thought

on Jul 3, 2012
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Britain’s first double-dip recession since the 1970s was confirmed on June 28 by official figures from the Office for National Statistics (ONS) revealing a sharper decline in the economy in the final quarter of last year. Gross domestic product (GDP) shrank by 0.4 per cent between October and December 2011, compared to a previous estimate of 0.3 per cent, while the economy contracted by an unchanged 0.3 per cent in the first quarter of this year, ONS said. Economists have also forecast that the UK economy has shrunk in the second quarter of this year, negatively affected by June’s extra bank holiday.

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The recently-released ONS figures also showed the toll the double-dip has taken on the UK families. Household disposable income has fallen by 1.8 per cent in the six months of the recession, split evenly between the first quarter of this year and the final three months of 2011 – causing consumer spending to drop 0.1 per cent in the quarter. With these latest estimates, spending has now fallen in four of the last five quarters and a new Bank of England (BoE) report suggests there is little prospect of relief. In fact, banks have become increasingly reluctant to lend to households and businesses as they attempt to clean up their balance sheets. What is more, British banks expect to significantly raise borrowing costs for customers over the next three months, as the cost of their own funding rises, BoE figures showed.

!m[](/uploads/story/134/thumbs/pic_1_inline.png)Separately the ONS published data showing that the UK’s current account deficit widened more than expected to £11.2 billion in the first quarter of the year from £7.2 billion in the final three months of the previous year. The deficit was much larger than expectations of a £9 billion shortfall, and represents some 2.9 per cent of GDP. The current account balance measures the difference between the UK’s total exports of goods, services and transfers – which include money flowing to and from international trading partners like the EU – and its total imports from them. A deficit means there is a net outflow of funds from the UK.

The weak picture of the UK economy was further underlined by ONS figures showing that government spending grew between January and March 2012 at its fastest rate in nearly seven years. According to the presented data, the 1.9 per cent surge in government expenditure was driven by higher spending on public administration, health and defence.
Notwithstanding the deeper recession, economists said there was some cause for optimism. Separate data on business investment showed that investment rose 1.9 per cent from the previous quarter and 14.8 per cent from the same period a year ago. Manufacturing investment fell 0.3 per cent amid declining output, but non-manufacturing investment rose 2.2 per cent.

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