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Britain slipped back into recession at the start of this year, with economists concluding that even the most generous interpretation of official data released on Wednesday suggested the economy had flatlined for over a year.
The Office for National Statistics said that output for the first three months of the year contracted by 0.2 per cent, following a 0.3 per cent decline at the end of 2011.
“A second consecutive drop in GDP in the first quarter leaves the UK meeting the technical definition of recession,” said Allan Monks, economist at JPMorgan. “But we believe it is fairer to characterise the UK as under-delivering on growth, rather than experiencing a double-dip recession.”
However, economists were troubled by the insipid performance of Britain’s services sector – the UK’s economic powerhouse, accounting for around 75 per cent of output. Without the sharply negative performance of the construction sector, which fell by 3.0 per cent, GDP would have been flat for the quarter.
Michael Saunders, economist at Citi, said Britain was experiencing “the deepest recession and weakest recovery for 100 years.”
“It is now four years since real GDP peaked in the first quarter of 2008,” he said, noting that the level of GDP at the end of the first quarter of 2012 stood 4.3 per cent below its pre-recession peak.
The current recovery is very weak compared with other post-recession periods of last century, where the bounce-back has occurred more rapidly, he said. Worse still, comparing the current level of GDP to the theoretical level of growth witnessed in the 20 years prior to the recession shows output is 14 per cent below trend.
There was scant hope of recovery contained in the finer details of Wednesday’s data. Not only did services output fall by 0.4 per cent in February, but January’s growth rate was revised down to zero. In particular, the distribution, hotels and restaurants sector contracted by nearly a full percentage point, possibly a function of harsh weather early in the month.
More worryingly, business and financial services, which dwarfs all other services sub-sectors, also contracted in February, showing an anaemic 0.1 per cent rise for the quarter.
Industry groups were divided on how well the latest official numbers reflected what is going on in the real economy. While a spokesman for the British Retail Consortium said the data was an accurate reflection of what businesses were seeing, the EEF, a group of manufacturers, disagreed.
“The anecdotal evidence is much more positive than the numbers today,” an EEF spokesman said.
More broadly, economists debated how monetary policy makers would interpret the negative data, particularly since a senior Bank of England official recently suggested that headline GDP was not the most critical factor when it came to measuring the nation’s economic health.
”The Monetary Policy Committee will be focused mainly not on headline growth but rather on indicators of underlying activity,” Paul Tucker, deputy governor, said in a recent speech in which he also noted that inflation may well prove stickier than had been expected.
George Buckley, economist at Deutsche Bank, said that further purchases of gilts, known as Quantitative Easing, were unlikely to be announced at the MPC meeting in May, especially since the MPC member most supportive of this stimulus – Adam Posen – has backed down.
“Given last week’s hawkish commentary
and higher inflation and employment figures, we continue to expect that the Bank will not sanction more QE on May 10,” Mr Buckley said. “After all, the MPC was keen to highlight the stronger survey indicators over the official data.”
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