April 25, 2012

U.K. in Double-Dip Recession

Could spur criticism of budget cuts

For the first time since the 1970s, the U.K. is in a double-dip recession. A construction slump added to a fall in GDP in the first quarter.

Bloomberg reported that the Office for National Statistics said Q1’s GDP fell 0.2% from Q4 2011, when it dropped 0.3%. In addition, there is little hope for economic expansion in months to come. The Bank of England (BoE) is in the last month of its latest stimulus boost, and the euro zone is beset by its own woes, thus dimming prospects that Britain’s largest market for exports could contribute to a rise in sales.

The news is not expected to sit well, particularly as anti-austerity protests swell across Europe, and both Prime Minister David Cameron and Chancellor of the Exchequer George Osborne could come in for some hefty criticism over budget-cutting policies.

“This isn’t supportive of the fiscal consolidation program, so the government is likely to be concerned about that,” according to Philip Rush, an economist at Nomura International in London, who was quoted saying, “The data were bad, and that supports the view that the Bank of England will do a final 25 billion pounds of quantitative easing in May.”

Construction fell 3% in the quarter, which was the most since Q1 of 2009. Other declines were seen in industrial production, which fell 0.4%, and manufacturing, which dropped 0.1%. Services, on the other hand, rose by 0.1%, helped along by transport, storage and communication. But that was not enough to keep the country from a double dip.

Still, the British Chambers of Commerce expect that figures will be revised upward, citing more hopeful attitudes on the part of manufacturers. The Confederation of British Industry’s quarterly gauge of factory optimism surged to 22 from -25 in January, with manufacturers’ confidence hitting its highest level in two years this month.

However, squeezed consumers may not justify that confidence, with higher energy costs, minimal wage growth and cuts in government spending pushing them to tighten their belts. When added to tough economic conditions in the euro zone, which will pressure exports, manufacturers may be a bit premature in their optimism.

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