Triple dip? No, it’s not a fancy ice cream cone, but the situation Britain found itself facing in late January. The tight purse strings of a failed austerity program in the U.K. have caused the British economy to flirt with a triple-dip recession. That means investors should be wary, at least in the short term, when looking to a country for opportunities to invest, and choose their opportunities wisely.
The last three months of 2012 were not kind to the U.K. Its GDP shrank by 0.3%, more than expected, and although its stock market has largely shrugged it off, the pound did not—nor did manufacturers whose output, according to the National Office of Statistics, dropped by enough to offset a small increase in construction. Global belt-tightening against the tough economy caused manufacturing to slow.
Although factory output did expand for a second month in January, it had expanded faster the month before. Markit Economics released figures showing that orders continued to increase, thanks to a “robust increase in consumer goods,” and domestic orders rose against falling export orders. In December, the U.K.’s expansion indicated an adjusted 51.2; in January, the gauge for factory output was a still-positive 50.8—lower than December, but still on the side of expansion, according to Markit.
Britain was left with zero growth for the year and the threat of a third recession in four years. Its economy is 3.5% lower than at its peak in 2007, and this looks to be the slowest recovery in a century, with economists estimating at least another two years to go.
The services sector picture looks worse than that of manufacturing, after a December in which it fell at the fastest rate in two years. Lower post-Olympic demand has caused the sector to drop. Without a corresponding recovery in services, Markit questioned whether the manufacturing growth would be enough to ward off that triple-dip recession.
The financial sector is still in flux, with more job and pay cuts, criminal prosecutions at home and abroad, sizeable financial penalties and tighter regulations in the offing in the wake of numerous City scandals that ranged from LIBOR fixing to the London Whale’s excesses to the miss-selling of loan insurance policies.
In addition, a number of other factors were converging at the end of January and beginning of February to make the next few months look somewhat uncertain. A forthcoming change in administration at the Bank of England, with Canadian Mark Carney set to take over from present Governor Mervyn King, had economists believing that the central bank would not take any additional measures—either in interest rate action or in other policies—until the changeover had occurred. Carney is believed to favor more dramatic action than King to boost the economy. However, that’s still some five months in the future.
The BoE had already stopped buying up bonds, and that sent yields rising in direct opposition to the results Prime Minister David Cameron’s austerity policies were supposed to produce. And the pound saw its longest decline since September, as anxiety over a sputtering economy saw the currency fall against the euro.