April 25, 2012

In Focus: The UK Slides Quietly Into Recession

by Alpha Now Research Team

It’s somehow entirely suitable that when the news came out early today that the UK had slipped back into a recession during the first quarter of 2012, the weather matched the public mood: it was pouring rain.

By some standards, public finances in Britain are in better shape than those of the eurozone nations now struggling with their own economic problems. Although Britain’s unemployment rate has climbed to well above German levels, it’s still lower than that of France. The yields on 10-year government bonds hovers around 2%, a fraction of what countries like Spain must pay in interest to finance their economies. Nonetheless, the Office for National Statistics announced that the British economy contracted 0.2% during the first quarter of 2012, following the 0.3% shrinkage in the fourth quarter of 2011. Two consecutive quarters of contraction translates into a recession, by the standards of most economists.

The culprits? The ONS attributed the first-quarter downturn to a slump in construction activity of 3% and to a more modest decline of 0.4% in industrial production. The tiny gain of 0.1% in the UK’s large services sector couldn’t offset this trend. The 0.2% decline compares to an average expansion in quarterly GDP of 0.5% in the period since 1980.

As can be seen in the chart below, the UK has struggled to get back on the growth track after the 2008 financial crisis and the ensuing recession, lagging not only the United States but even the eurozone.

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Britain’s economy has struggled to post significant growth since the election of Prime Minister David Cameron’s coalition government almost exactly two years ago. Cameron has been on of the advocates for austerity – for closing budget gaps with a combination of higher taxes and cuts in government spending. That strategy – which has been forced on countries like Greece as a condition of ECB bailouts, and which has been adopted more or less voluntarily by other eurozone leaders such as France’s Nicolas Sarkozy (who has seen his austerity-based policies become the major issue in the ongoing French presidential election) – is causing many Britons to argue that austerity will never produce a return to economic growth.

While the outcome of the austerity vs. stimulus debate remains unclear, there is some room for hope that this first estimate of first-quarter GDP will be revised upward. The widely followed purchasing managers indices compiled by Markit Economics appear to be signaling that this first estimate may be overly bearish, with its own numbers appearing to indicate that the economy grew by 0.5%. Moreover, the International Monetary Fund still calls for the British economy to expand 0.8% for 2012 as a whole. That growth is far from spectacular – indeed, it would rank as one of the lowest gains since the end of the recession in the early 1990s – but it would signal that the economy is growing instead of shrinking.
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