British economy slides into recession

Wed, Apr 25, 2012, 01:00

The British economy slid into its second recession since the financial crisis after official data unexpectedly showed a fall in output in the first three months of 2012, piling pressure on prime minister David Cameron's embattled coalition government.

The Office for National Statistics said Britain's gross domestic product fell 0.2 per cent in the first quarter of 2012 after contracting by 0.3 per cent at the end of 2011, confounding forecasts for 0.1 per cent growth.

Most economists had expected Britain's $2.4 trillion economy to eke out modest growth in the early 2012, but these forecasts were upset by the biggest fall in construction output in three years coupled with anaemic service sector growth and a fall in industrial output.

Today’s figures will be a deep blow for Britain's Conservative/Liberal Democrat coalition, which has slid in opinion polls since a poorly received annual budget statement in March and risks embarrassment at local elections on May 3rd. The government is also under pressure over revelations about its close relationship with media tycoon Rupert Murdoch.

The government desperately needs growth to achieve its overriding goal of eliminating Britain's large budget deficit over the next five years.

Britain's economy contracted by 7.1 per cent during its 2008-2009 recession and recovery since has been slow, with headwinds from the euro zone debt crisis, government spending cuts, high inflation and a damaged banking sector.

Today's data showed that output was still 4.3 per cent below its peak in the first quarter of 2008, and the economy has only grown by 0.4 per cent since the government came to power in the second quarter of 2010.

Output in Britain's service sector - which makes up more than three quarters of GDP - rose by just 0.1 per cent in the first quarter after falling 0.1 per cent in the fourth quarter of 2011, kept down by a fall in output in the large business services and finance sector.

Industrial output was 0.4 per cent lower, while construction - which accounts for less than 8 per cent of GDP - contracted by 3.0 per cent, the biggest fall since the first quarter of 2009.

Britain's Office for Budget Responsibility forecasts growth of 0.8 per cent this year. Today’s data shows that first quarter output was no higher than a year earlier.

The Bank of England has warned that there is a risk of another contraction in the second quarter of 2012, due to an extra public holiday. But unlike during the previous two quarters, it does not appear keen to provide further monetary stimulus through quantitative easing asset purchases, due to above-target inflation which looks stickier than before.

The BoE, and a number of private-sector economists, had argued before today that the underlying health of Britain's economy was stronger than ONS data suggested, due to relatively upbeat private-sector surveys and a fall in unemployment.

The ONS's preliminary estimates of GDP are the first released in the European Union, and are based partly on estimated data. On average, they are revised by 0.1 percentage points up or down by the time a second revision is published two months later, but bigger moves are not uncommon.