The United Kingdom has confounded expectations by sliding
back into recession, according to official figures revealing
that even the painfully slow recovery eked out since the
2008-'09 economic crisis has disappeared. And analysts say
Prime Minister David Camerons government has few good
options available to spur recovery.
Wednesdays numbers show the U.K. entering double-dip
territory where the economy suffers a new
recession before output has recovered from the last
one for the first time since the crisis years
of the 1970s.
This is a worse performance for the economy than the
Great Depression of the 1930s, said George Buckley, chief
U.K. economist at Deutsche Bank in London. Fiscal
austerity, private sector debt reduction, European sovereign
uncertainty and sticky inflation all present challenges to the
The 0.2 percent fall in output for the first quarter of this
year, which followed a 0.3 percent decline in the previous
three months, shocked many economists in the City of London
most of whom had predicted a small rise. Several
responded by suggesting the precipitous 3 percent fall in
construction activity the main driver behind
the overall decline for the economy as a
whole might be revised in future months to
show a less severe slide.
Economists acknowledge, however, that regardless of later
revisions that may or may not show a narrow escape from
recession, the gross domestic product (GDP) figures confirm a
distressing picture: The U.K.s recovery from the severe
downturn that ended three years ago has been extremely
disappointing. In addition to the fall in construction,
industrial production declined by 0.4 percent, and the huge
service sector rose by only 0.1 percent.
Deutsche Bank noted that in the past, output has bounced
back with a vengeance following recessions to grow at about 3
percent a year. This is above the long-run trend of growth of
the U.K. economy, which is around 2 percent. However, Deutsche
calculates that since the previous recession ended in mid-2009,
growth has averaged only 1.1 percent.
This is partly because government departments and households
are trying, at the same time as each other, to reduce high
debts accumulated in earlier years.
The euro zone debt crisis has imposed an added
burden depressing demand in a 17-member
currency bloc that accounts for about half of U.K. exports.
Many economists think the euro zone also returned to recession
in the first quarter.
The persistence of high inflation will constrain the Bank of
Englands ability to respond to weak growth with further
quantitative easing last mandated by the
banks Monetary Policy Committee in February.
Consumer price inflation rose by 0.1 percentage point to 3.5
percent in March boosted by higher gas and
electricity prices. It is far above the Bank of Englands
target of 2 percent.
Inflation has also hit the economy by reducing Britons
spending power. Inflation is rising faster than pay growth,
which has been depressed by rising unemployment.
The freedom of maneuver for George Osborne, the U.K.s
Conservative finance minister, is even more limited. The U.K.
has avoided the debt crises of euro zone neighbors, despite a
gaping deficit which dwarfs Italys and Spains, in
part because of Osbornes unflinching insistence that
there is no plan B to replace his unwavering
commitment to reduce the deficit through spending cuts. This
leaves virtually no room for government largess to pump-prime
demand. Moreover, abandoning the fiscal tightening to give a
fillip to the economy would mean discarding the
Conservative-Liberal Democrat coalition governments
central policy inflicting fatal political
damage on the administration at a time when it is already
performing dismally in opinion polls.
Economists worry, in addition, that the inherent structure
of the U.K. economy has constrained its ability to recover
The financial services sector, which has been at the very
center of the downturn, is recovering only slowly across much
of the world. This is particularly germane to the U.K., where
the sector accounts for an unusually high 9 percent of GDP.
By contrast, global manufacturing has bounced back much
faster from the downturn as it tends to do
following recessions. However, manufacturing accounts for a
much lower share of U.K. output about one
tenth than in Germany and several other
The U.K. stock market responded to Wednesdays poor
economic news by virtually missing out on the days global
rise in equities. The FTSE 100 closed only 0.2 percent higher
The U.K.s low economic growth will, by reducing tax
revenue, make it harder for the U.K. to cut its high fiscal
deficit forecasted by the International
Monetary Fund at 8 percent of GDP this year. Yet one of the
most striking aspects of the U.K.s economic sluggishness
has been the absence of any significant reaction by the
government bond market. Yields on 10-year gilts rose 5 basis
points to 2.15 percent on Wednesday, but this still left
inflation-adjusted interest rates for gilt investors at less
than zero meaning that investors are paying,
in real terms, for the privilege of parking their money in U.K.
government debt. Analysts attribute this to the Bank of
Englands ability in contrast with the
euro zone central bank to print as much money
as it likes to prevent a run on gilts.
The pound remains strong largely because of the safe-haven
attractions of sterling-denominated debt. As the Wednesday
U.K. afternoon ended, sterling was at
$1.61 little changed on the day and up 6 cents
since the beginning of the year.
Jim Leaviss, fixed-income fund manager at M&G
Investments in London, worries that this safe-haven status
could, ironically, hurt the U.K. economy further. In a note
published on Monday, he calculated that sterling had risen by
more than 7.25 percent since June, on a trade-weighted basis.
Because of its exceptionally strong performance
there could be big headwinds for the U.K. economy over
the next few months, warned Leaviss.
Higher exchange rates dampen economic activity by reducing
the competitiveness of exporters.
Economists also warn that the Queen may make her own
contribution to the U.K. recession. Output is at risk of
falling for a third straight quarter because of the June
Diamond Jubilee holidays marking Elizabeth IIs 60 years
on the throne. By keeping factories idle for more days than
usual, the Golden Jubilee vacation time ten years ago slashed
manufacturing output by 6 percent month on month.