UK returns to recession in first quarter on building slump

The UK economy shrank in the first quarter as construction output slumped, pushing Britain into its first double-dip recession since the 1970s.

Gross domestic product contracted 0.2 per cent from the fourth quarter of 2011, when it shrank 0.3 per cent, the Office for National Statistics said on Wednesday in London. The median of 40 estimates in a Bloomberg News survey was for a gain of 0.1 per cent. A technical recession is defined as two straight quarters of contraction.

The report will heap further pressure on Prime Minister David Cameron as he faces criticism of his budget cuts and questions about the relationship between senior government ministers and News Corp. It comes at a time when prospects are dimming in the euro region, Britain’s biggest export market.

 

“This isn’t supportive of the fiscal consolidation program, so the government is likely to be concerned about that,” said Philip Rush, an economist at Nomura International in London. “The data were bad, and that supports the view that the Bank of England will do a final £25 billion of quantitative easing in May.”

The pound fell more than 0.3 per cent against the dollar after the report and was trading at $1.6095 as of 9.46 am in London, down 0.3 per cent on the day.

The economy was unchanged from a year earlier, the statistics office said. The median estimate in a Bloomberg survey of 31 economists was 0.3 per cent growth.

Construction slump
The fall in GDP from the fourth quarter was due to a three per cent drop in construction, the most since the first quarter of 2009, and a 0.4 decline in industrial production. Manufacturing contracted 0.1 per cent. Services, the largest part of the economy, expanded by 0.1 per cent, boosted by transport, storage and communication. Rising energy prices, government spending cuts and anemic wage growth are squeezing consumers, creating a drag on the recovery. Pay growth slowed to 1.1 per cent in the three months through February, less than a third of the inflation rate.

An extra public holiday in June to mark Queen Elizabeth II’s 60 years on the throne may also depress economic output in the second quarter.

Britain was hit hard by the financial crisis that erupted in 2007 and GDP is still 4.3 per cent below its pre-recession peak in early 2008, with only Japan and Italy further behind among Group of Seven countries. Britain is the first G-7 country to report output for the first quarter.

Double dip
It was 1975 when Britain last experienced consecutive falls in GDP before the economy had recovered output lost in the previous recession, the definition of a double-dip recession.

Meanwhile, the 17-nation euro region, Britain’s biggest export market, may also be back in recession, surveys suggest. Treasury forecasters and the International Monetary Fund expect the UK economy to grow 0.8 per cent this year, the same as last year.

As an anti-austerity backlash gains ground in Europe, Cameron and Chancellor of the Exchequer George Osborne have rebuffed opposition calls to pull back from a budget-cutting program aimed at eliminating most of the deficit by 2017.

Their Conservative Party has lost public support over last month’s budget, which voters say helped the rich at the expense of pensioners and charities, and the handling of a threatened strike by tanker-truck drivers. The Labour opposition led the Tories by 41 per cent to 33 per cent in an ICM Ltd. poll published yesterday.

Murdoch evidence
Cameron will come under further pressure today when Rupert Murdoch gives evidence on his relationship with politicians a day after probing of his son James ended with calls for Culture Secretary Jeremy Hunt to quit over his dealings with News Corp.

The economy may get little further help from the Bank of England, whose officials have suggested inflation may retreat less quickly than they forecast two months ago. Only David Miles on the nine-member Monetary Policy Committee sought an expansion in emergency stimulus this month.

Miles said yesterday in an interview with Bloomberg News voting for more bond purchases was “still the right strategy.” Following a stronger near-term price outlook, “inflation will go back to the target level and quite likely sit beneath it if you look beyond the next six to nine months.”

The US Federal Reserve will release its policy statement at around 12.30 pm on Wednesday in Washington, and its forecasts for interest rates, growth, inflation and unemployment at 2 pm. Policy makers will probably repeat their plan to keep the benchmark interest rate low at least through late 2014, economists say.