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« Memo To Draghi: We, The People, "Don't Trust You One Inch" | Main | Cost of Spain’s Housing Bust Could Force a Bailout »
Wednesday
Apr252012

British Economy Slips Back Into Recession

  

LONDON — Britain slid back into recession in the first quarter of the year, according to official figures released Wednesday, undercutting the government’s argument that its austerity program was working, according to The New York Times.

The British economy shrank 0.2 percent in the first quarter after contracting 0.3 percent in the fourth quarter of last year, the Office for National Statistics said Wednesday. The first double-dip recession in the country since the 1970s was mainly the result of a slump in the construction industry at the beginning of this year.

Some economists had predicted a small increase in first-quarter gross domestic product after recent surveys had indicated that the British economy was recovering, albeit very slowly. Prime Minister David Cameron’s government had pointed to the recovery as a sign that the austerity measures it implemented were working.

The economy slipping back into recession comes as a blow” said Azad Zangana, an economist at Schroders. “It’s too early to call for a reversal of government policy, though these latest results do highlight that the economy will not withstand any further acceleration in cuts.”

The pound fell against the dollar and the euro on Wednesday.

The G.D.P. numbers caused bewilderment among some economists, including Andrew Goodwin of Ernst & Young’s economic forecasting unit, the ITEM Club. “Our reaction to these figures is one of disbelief,” Mr. Goodwin said. “I would be very surprised if these figures were not revised upwards.”

A return to a recession gave new ammunition to the opposition Labor Party, which has accused the government of hampering an economic recovery by cutting spending too deeply without offering enough economic stimulus.

In a packed Parliament on Wednesday, Edward S. Miliband, the leader of the opposition Labour Party, called the numbers “catastrophic” and said that Mr. Cameron’s “plan had failed.”

Mr. Cameron agreed that “these are very, very disappointing figures” and that Britain was in a “very tough situation that frankly just got tougher.” But he added that the government would stick to its austerity plan, which is intended to eliminate most of the budget deficit by 2017.

More debt and more spending is what got us into this problem,” Mr. Cameron said. “It can’t be the solution of the problem.”

Mr. Cameron’s government, a coalition of the Conservatives and Liberal Democrats, has been losing ground to Labour in recent opinion polls as voters become disillusioned with the economic outlook and the austerity plan.

The recession also poses a new challenge for the Bank of England, which is just completing its most recent round of fiscal stimulus. Amid signs that the economy improved, the central bank’s policy-making committee had indicated that it might not extend the bond purchasing program next month and would instead return its focus to inflation. But after Wednesday’s figures, the central bank might be forced to rethink its position.

The weak economic data in Britain comes as the outlook for the euro zone economies is deteriorating. The economy of the 17-nation euro zone, Britain’s largest export market, shrank 0.3 percent in the last quarter of 2011 and the European Central Bank said the regional economy might contract 0.1 percent this year.

The impact of E.C.B.’s injection of more than €1 trillion, or $1.3 trillion, of cheap loans to banks since December has started to wane and far-reaching austerity packages and rising unemployment is making a recovery difficult.

In Britain, the economy has struggled as consumers have been hurt by the government austerity plan, which includes thousands of public sector job cuts, together with relatively high inflation of 3.5 percent. Many companies are holding back investments due to tight bank lending and concerns about sluggish demand for services and goods at home and on the Continent.

Even if the dismal first-quarter figures were revised upward, they could have a negative impact on consumer sentiment and corporate spending, said Howard Archer, an economist at IHS Global Insight. The report could “hit consumer and business hard and make sustainable growth harder to achieve.”

Output in the construction sector fell 3 percent in the first quarter while production industries fell 0.4 percent, the statistics office said Wednesday. Manufacturing shrank 0.1 percent and the services sector grew 0.1 percent.

Although the fall in G.D.P. in the first quarter was relatively small, the impact on the economy will be much greater because of the knock to consumer and business confidence,” said the Institute of Directors, a club of senior business executives.

This article has been revised to reflect the following correction:

Correction: April 25, 2012

An earlier version of this article incorrectly said the European Central Bank’s injection of cheap loans started in 2012; it began in December.

 

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