UK lurches back into recession as 0.2% GDP fall signals 'double-dip'

UK lurches back into recession as 0.2% GDP fall signals 'double-dip'

By Ed Monk

PUBLISHED: 03:47 EST, 25 April 2012 | UPDATED: 09:40 EST, 25 April 2012

The UK has slumped back into recession with official data confirming a 0.2 per cent fall in GDP growth in the first quarter of the year.

The news will dismay the Treasury which has seen its austerity-based economic plan put under pressure as growth has slowed. It confirms a 'double-dip' - a scenario seen in previous economic slowdowns when a second slump follows an initial recession.

It is the first 'double-dip' that the UK has suffered since the 1970s.

The Office for National Statistics (ONS) reported today that UK gross domestic product (GDP) fell 0.2 per cent between January and March. That was worse than economist forecasts which had been for slender 0.1 per cent growth.

Growing pains: George Osborne hit his deficit-busting target yesterday but needs growth to pick up if his austerity-based plan is to work.

Earlier optimism that the UK could avoid recession were dashed with the production industries, or manufacturing, and construction both receding in the period. Construction in particular - down 3 per cent - has slammed into reverse. It was the biggest fall in construction output for three years.

Only the dominant services sector showed any growth, growing by just 0.1 per cent, while manufacturing dipped 0.4 per cent.

The GDP fall follows a 0.3 per cent decline in the final quarter of 2011, fulfilling the technical definition of recession - two consecutive quarter of negative GDP growth. It means the UK economy has grown just 0.4 per cent since the Government came to power almost two years ago.

Following the release of the data, Chancellor George Osborne said: 'It's a very tough economic situation. It's taking longer than anyone hoped to recover from the biggest debt crisis of our lifetime - even after the recent fall in unemployment.

'But over many years this country built up massive debts, which we are having to pay off.'

The GDP fall is at odds with official forecasts form the independent Office for Budget Responsibility which last month predicted the UK would avoid a new recession and register first quarter growth. It has a forecast of GDP growth in 2012 overall of 0.8 per cent.

Wide of the mark: Official OBR forecasts have proved optimistic.

Sterling retreated from a seven-month high against the dollar and fell against the euro. The pound fell 0.6 per cent versus the euro, giving back gains from the past week to stand at €1.2158. Sterling also fell 0.3 per cent against the dollar to $1.6078.

The FTSE 100 was around 30 points ahead when the figure came through but fell around 10 points afterwards. The impact of economic growth on asset prices is made more difficult to gauge because lower growth, which would normally indicate lower profits, could also trigger an extension of the Bank of England's Quantitative Easing (QE) asset purchase scheme that tends to push market sentiment higher.

'Double-dip' describes the effect where an economy's output begins to fall for a second time having failed to recover the ground lost from a first recession. The GDP fall today means that UK economic output is still 4.3 per cent lower than at at the start of the 2008-9 recession.

That recession lasted a year and saw GDP output fall 7.1 per cent. The 'double-dip' confirmed today is expected to be milder and more shortlived than that.

There were few shreds of comfort in the ONS analysis. Officials said that no special circumstances impacted the figures, although the figure was based on the first reading of economic data and could change as more detail emerges in the months ahead. 

Darren Morgan, a statistician on the GDP team at the ONS, said that almost all the fall in GDP was accounted for by the slump in construction.

He said: 'The fall in construction came mainly from public sector funded projects. There was also a fall for production industry activity, in particular a fall in quarrying, which covers oil and gas production.'

The ONS said that panic buying of petrol at the end of March had little impact on the figures. There had been speculation that the pre-Easter rush to refill, amid fears that a potential tanker driver strike could interrupt supply, could boost economic activity in the first quarter of the year.

< p>However, Mr Morgan said that the buying came only in the last few days of the period and had no significant impact.

Economists have said the ONS's reading of the economy may be too gloomy, as recent industry surveys for both the manufacturing and construction sectors have pointed to growth.

Chris Williamson, chief economist at Markit, said: 'The underlying strength of the economy is probably much more robust than these data suggest.

'The danger is that these gloomy data deliver a fatal blow to the fragile revival of consumer and business confidence seen so far this year, harming the recovery and even sending the country back into a real recession.'

The GDP figure is based on the first reading of economic data for the period and can be revised as more detailed information emerges in the months ahead. The average difference between the first and final readings of GDP data is 0.2 percentage points, but revisions may be upwards or downwards.

It suggests that later GDP revisions are unlikely reverse the fall completely, and could push the reading lower.

Economists were hopeful that more positive recent data could lead to upward revisions.

James Knightley of ING said: 'Deputy Bank of England Governor, Paul Tucker, commented recently that the GDP numbers come with a "risk of mis-measurement" because of construction data issues. He indicated that looking at the business surveys may provide a truer picture of the state of the UK economy than the official measure of GDP, which suggests he will not be overly concerned by a disappointing GDP reading.'

Vicky Redwood of Capital Economics said: 'Admittedly, the fall was driven by a sharp fall in construction output and there are question marks over the reliability of these numbers. That said, the drop in construction was smaller than anticipated and, even without this, output would have done no better than stagnate.

'We would not dismiss today's fi gures so readily. And even if the underlying picture is stronger than the official GDP figures show, there is no guarantee that the recent pick-up will continue. Indeed, we remain comfortable with our view that GDP will contract by about 0.5 percent this year.

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