Europe’s financial woes have spread across the English Channel as the United Kingdom slid into its first double-dip recession since the 1970s. Britain’s GDP fell 0.2 percent from the 4th quarter of 2011, when it declined 0.3 percent, according to the Office for National Statistics (ONS).
As anti-austerity backlash grows on the Continent, Prime Minister David Cameron said the data was “disappointing” and promised to shore up growth without backtracking on the UK’s biggest fiscal squeeze since World War II. “I don’t seek to excuse them, I don’t seek to try to explain them away,” Cameron said. “There is no complacency at all in this government in dealing with what is a very tough situation, which frankly has just got tougher.” Cameron said “We have got to rebalance our economy. We need a bigger private sector. We need more exports, more investment. This is painstaking, difficult work but we will stick to our plans, stick with low interest rates and do everything we can to boost growth, competitiveness and jobs in our country.”
Opposition leader Ed Miliband said the figures are “catastrophic” and asked Cameron why this had happened. “This is a recession made by him and the chancellor in Downing Street. It is his catastrophic economic policy that has landed us back in recession,” Miliband said.
The Bank of England is in the last month of economic stimulus and the fall-off in output comes as prospects dim in the Eurozone, 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 of quantitative easing in May.”
According to ONS, output in the production industries decreased by 0.4 percent; construction fell by three percent. Output of the services sector, which includes retail, increased by 0.1 percent. The decline in government spending contributed to the particularly large fall in the construction sector. “The huge cuts to public spending – 25 percent in public sector housing and 24 percent in public non-housing and further 10 percent cuts to both anticipated for 2013 — have left a hole too big for other sectors to fill,” said Judy Lowe, deputy chairman of industry body CITB-ConstructionSkills, said.
The UK’s last double-dip recession, defined as consecutive quarterly drops in GDP, was in 1975. At that time, 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 (IMF) believe the economy will grow 0.8 percent this year, the same as last year. According to Chancellor of the Exchequer George Osborne, the UK’s economic situation is “very tough” and the government should stick to its plans of eliminating a majority 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. It’s taking longer than anyone hoped to recover from the biggest debt crisis of our lifetime,” Osborne said. “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.”
Chris Williamson, chief economist at Markit, said: “The underlying strength of the economy is probably much more robust than these data suggest. The danger is that these gloomy data deliver a fatal blow to the fragile revival of consumer and business confidence seen so far this year, harming the recovery and even sending the country back into a real recession.”
Not everyone agrees that the data indicates a double-dip recession. Writing in the Telegraph, Philip Aldrick says that “Economists have been questioning the reliability of the ONS numbers for a while now, but the latest data drew the debate sharply into focus. At -0.2 percent, the GDP reading was considerably worse than the consensus of 0.1 percent growth. The ‘discrepancy’, as Goldman Sachs’ Kevin Daly described it, was ‘unbelievable’ because much of the recent survey data – from the Bank of England’s agents’ reports to the purchasing managers’ indices – have been encouraging. Andrew Goodwin of the Ernst & Young ITEM Club agreed. ‘Our reaction is one of disbelief,’ he said. ‘The divergence is virtually unprecedented and must raise significant question marks over the quality of the data.’ They are not alone. No lesser institution than the Bank of England has queried the ONS data. Last week, minutes to the Monetary Policy Committee meeting damningly noted: ‘The sharp falls in construction output in December and January were perplexing, and the Committee was minded not to place much weight on them.”
Tags: Bank of England, David Cameron, Double-dip recession, Downing Street, economic stimulus, Ed Miliband, Eurozone, GDP, George Osborne, Harold Wilson, International Monetary Fund, Margaret Thatcher, Office for National Statistics, Quantitative easing, recession, United Kingdom