U.K. Economy Contracts in Q2

GDP decline of 0.7% is most in three years; weather, Jubilee holiday are blamed.

The U.K. economy unexpectedly shrank the most since 2009 in the second quarter as record rainfall and an extra public holiday hurt output, increasing pressure on Prime Minister David Cameron to abandon the government’s biggest budget squeeze since World War II.

Gross domestic product fell 0.7 percent from the first quarter, when it dropped 0.3 percent, the Office for National Statistics said in London today. Economists forecast a 0.2 percent decline, according to the median of 36 estimates in a Bloomberg News survey. Construction plunged 5.2 percent, production fell 1.3 percent and services declined 0.1 percent.

Signs of a deepening recession may add to calls for the government to do more to boost growth even after the Bank of England started a credit-easing program and increased bond purchases. The International Monetary Fund said this month that “further monetary stimulus is required” in the U.K. and the government should consider “scaling back” its fiscal tightening if growth doesn’t build momentum by early 2013.

“It is looking very unlikely that growth on average for this year can get on the right side of zero -- more likely a small contraction,” said Alan Clarke, an economist at Scotiabank in London. “Can the coalition government or the BOE do anything about the rain or lost working days? No, but that won’t stop claims that austerity is to blame and the BOE should do more.”

The pound erased its gain against the dollar after the data were published. It was down 0.2 percent at $1.5480 as of 10:14 a.m., having earlier risen as much as 0.3 percent.

From a year earlier, the U.K. economy shrank 0.8 percent in the second quarter, more than the 0.3 percent decline forecast by economists.

Part of the slump reflected the holiday for the queen’s Diamond Jubilee celebrations last month along with the wettest second quarter on record, which compounded strains on the U.K. from the debt turmoil in Europe. The statistics office said the GDP report includes estimates for June that are based on the impact of previous jubilee holidays in 1977 and 1992.

The ONS won’t be able to quantify what the impact of the extra public holiday and wet weather was until statisticians have “further experience against which to judge,” said Joe Grice, the statistics office’s chief economist.


Greater Uncertainty

“The margins of uncertainty of the preliminary estimate are therefore a little bit greater than usual because of these specific and unavoidable uncertainties,” Grice said at a press conference in London. “The scope for future revisions is a little bit greater than normal.”

Overall, “the underlying performance of the economy was probably somewhat better than the headline figure of minus 0.7 percent would suggest,” Grice said.

Today’s report also showed that manufacturing fell 1.4 percent in the second quarter from the previous three months. Within services, transport, storage and communication dropped 1.4 percent. The biggest drag on the economy in the quarter was from construction.

The U.K. is the first of the Group of Seven nations to report GDP data for the second quarter. U.S. growth probably cooled to a 1.4 percent annual rate in the period from 1.9 percent in the prior quarter, according to a Bloomberg survey. The Commerce Department will publish the data July 27.

Concerns are also growing about global growth. The IMF said in a report today that China’s slowing economy faces significant downside risks and relies too much on investment. While the economy “seems to be undergoing a soft landing,” achieving it is a key challenge, the IMF said.

The latest slump in U.K. GDP leaves output 4.5 percent below its peak in the first quarter of 2008. It has fallen 0.9 percent since the third quarter of 2010, just after Cameron’s coalition government came to power. Cameron and Chancellor of the Exchequer George Osborne have been criticized by the opposition Labour Party for compounding Britain’s economic troubles with the fiscal squeeze.

In addition to domestic issues, pressure is coming from the debt crisis in the euro area, Britain’s biggest trading partner. Moody’s Investors Service cut to negative the outlook on the Aaa credit ratings of Germany, Europe’s biggest economy, the Netherlands and Luxembourg, citing “rising uncertainty” over the turmoil. Spain has edged closer to needing a full international bailout.



“We all know the country has deep-rooted economic problems and these disappointing figures confirm that,” Osborne said in a statement released by his office following the data. “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 percent and businesses have created over 800,000 new jobs,” the chancellor said. “But given what’s happening in the world we need a relentless focus on the economy and recent announcements on infrastructure and lending show that’s exactly what we’re doing.”

The Bank of England’s Monetary Policy Committee expanded its bond-purchase program, known as quantitative easing, by 50 billion pounds ($78 billion) to 375 billion pounds on July 5. Officials said they may review the merits of cutting the benchmark interest rate, currently at a record-low 0.5 percent, once they assess the impact of their new Funding for Lending program.

Today’s GDP data “shows the U.K. economy is still very fragile and proactive policy measures will continue to be needed to put in place,” David Tinsley, an economist at BNP Paribas SA in London, said in a telephone interview. “So we’re still looking for 50 billion pounds of QE in November, supplemented with a 25 basis point rate cut.”

Royal Bank of Scotland Group Plc said before today’s data were published that there may be a “significant bounce” in third-quarter GDP. Barclays Plc estimated one-off factors cut April-June growth by 0.5 percentage point, “setting the scene for a strong rebound.”

The labor market is showing signs of defying the slump. The jobless rate fell to 8.1 percent in the three months through April from 8.2 percent as the London Olympics helped to create jobs. At the same time, pressure on households may ease as inflation cools. The rate fell to 2.4 percent in June, the lowest in 2 1/2 years.



Bloomberg News


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