As the world counts down to the opening of the Olympic Games in London on Friday, Londoners—and others in Britain—are dealing with an economy that in Q2 of this year slowed considerably more than expected. Also, with British banks being pressured to estimate the effects of the LIBOR rigging scandal on their balance sheets ahead of earnings reports expected later this week for the first half of the year, the numbers are expected to be “underwhelming.”
Bloomberg reported Wednesday that the Office for National Statistics in London announced Q2 numbers indicating a deepening recession. GDP fell for the third straight quarter, but it was the amount that surprised: a 0.7% plunge after Q1’s numbers dropped 0.3%. Economists surveyed earlier had expected a median fall of 0.2%.
The U.K. economy was also down 0.8% from a year ago; when economists had predicted a 0.3% year-on-year drop. It had not fallen so much since Q3 of 2009. While unemployment was a slight bright spot, down to 8.1% in the three months through April from 8.2%, thanks in part to the coming Olympics, the rest of the numbers were not so bright.
Reuters reported that the service sector, making up more than 75% of Britain’s GDP, fell by 0.1%, after rising 0.2% in Q1. Industrial output fell by 1.3%. Construction followed suit, plunging by 5.2%—the most since Q1 of 2009.
The statistics office said some fall in GDP was expected because of the extra holiday for the queen’s diamond jubilee. The wettest second quarter on record was also cited, with both events creating “additional uncertainty.” The office also said the GDP report included estimates for June based on the effects of previous jubilee holidays in 1977 and 1992.
“This is terrible data. Frankly there’s nothing good that comes out of these numbers at all,” said Peter Dixon in the report. Dixon, an economist at Commerzbank, added, “The economy looks to be badly holed below the water line at this stage. It’s a far worse period of activity than we’d expected.”
The report puts additional pressure on both Prime Minister David Cameron and Chancellor of the Exchequer George Osborne to rethink their commitment to austerity measures in an effort to eliminate the country’s structural budget deficit over the next five years, as the Labour Party turns on the heat over such measures trying to do too much too soon.
However, both continue to resist a change in strategy. Osborne and Bank of England (BoE) Governor Mervyn King worry that a change could trigger a loss of confidence in Britain’s commitment to long-term deficit reduction.
In a statement, Osborne said, “We’re dealing with our debts at home and the debt crisis abroad. We’ve made progress over the last two years in cutting the deficit by 25% and businesses have created over 800,000 new jobs.”