British economy shrinks in first quarter

Thu, May 24, 2012, 01:00

The British economy shrank more than first thought between January and March, after the deepest fall in construction output in three years, while government spending made the biggest contribution to growth, official data showed today.

Britain is in its second recession since the 2007-2008 financial crisis, and an escalation of the euro zone debt crisis poses a significant threat to the economy going forward.

The Bank looks set to pump more money into the economy, having paused its £325 billion quantitative easing programme earlier this month, amid growing worries about a break-up of the currency union.

The Office for National Statistics said the economy shrank by 0.3 per cent in the first quarter of this year, a downward revision from an initial estimate of a 0.2 per cent decline, and confounding analysts' forecasts for an unchanged reading.

The decline would have been steeper were it not for a 1.6 per cent quarterly rise in government spending, which was the biggest increase in four years and contributed 0.4 percentage points to GDP.

Year-on-year, the economy contracted by 0.1 per cent, the first annual fall since Q4 2009.

The ONS said the downward revision to the Q1 data was the result of a sharp drop in construction output, which fell by 4.8 per cent on the quarter, its steepest decline since Q1 2009.

Household spending, meanwhile, rose by only 0.1 per cent, its smallest rise in six months and suggesting that a consumer-led recovery is not on the cards.

The figures showed that exports also suffered. The trade deficit increased to 4.4 billion pounds, with net trade shaving off 0.1 percentage point from GDP.

Separate preliminary data showed business investment posted its biggest quarterly rise in almost a year, and its largest annual increase in almost seven years.

The International Monetary Fund this week warned about the risks facing Britain and urged policymakers to boost growth by whatever means necessary.

It suggested the Bank could cut rates further from their record-low 0.5 per cent and start buying private-sector assets.

And it recommended that the government should find money to invest in infrastructure and do more to boost the flow of credit to companies. The IMF said Britain may even need to consider a temporary tax cut to bolster demand.

Although the bank is concerned that official data might be understating the strength of the economy, recent surveys have indicated that activity is tailing off, while an extra public holiday in June is also likely to depress growth in the second quarter.