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'Awful' economic data dash recovery hopes

Adrian Lowery, This is Money

24 July 2009, 10:08am

Hopes of an imminent recovery for the recession-hit UK economy were dashed today by figures showing it is in deeper trouble than was thought.

Figures from the Office for National Statistics showed that GDP shrank at a rate of 0.8% between April and June, far faster than the 0.3% economists had been expecting.

This fifth successive quarter of contraction means that the economy has shrunk 5.7% since the recession began in the second quarter of 2008.

The records now show that this is twice as deep as the early 1990s recession and approaching the level of the slump seen in the early 1980s. Sterling dropped by a cent against both the dollar and euro on the news to $1.6450 and EUR1.1577 respectively.

The Government has forecast the economy to contract by 3.25-3.75%, but GDP has already shrunk by 3.16% this year, and the economy is now on course to shrink by 4.5% over the year.

Although the rate of decline slowed significantly from the drastic 2.4% fall in the first quarter, the preliminary ONS data - which could yet be revised - deliver a blow to optimism that had begun to emerge on the prospects for recovery.

Vicky Redwood, chief economist at Capital Economics, did not mince her words, calling the figures 'pretty dreadful' and 'dashing any hopes that the UK had pulled out of recession in the second quarter. It confirms it's going to be a pretty hard task to get the UK economy back on track'.

A 0.7% decline in business services and finance was the biggest driver behind the 0.8% fall. Ross Walker, UK economist at RBS Financial Markets, said the poor showing from the services sector bodes ill for the wider economy a recent purchasing managers indices (PMI), had been positive. 'Bear in mind the PMI surveys, which are normally pretty leading, pointed to growth in May and June,' he said. 'You would have thought there would have been some feed-through.

'It casts doubt on whether we will actually see growth in Q3 ... it's worrying. This suggests that full year GDP could be down 4.5% or possibly even more, which would be truly awful.'

The stock market took the figures in its stride, with the FTSE 100 barely registering a wobble on the tenth day of its winning streak - it was last 30.4 points up at 4,590.2.

David Buik of BGC Partners said market watchers and traders were more sanguine about the GDP data: 'I do not understand where that estimated number of -0.3% for second-quarter GDP [came from]! I assume it was from a tombola! There have been no signs that the economy has improved that dramatically from -2.4% to 0.3%. -0.8% seems more than fair in the circumstances.' This latest damning evidence on the state of the economy could see the Bank of England's monetary policy committee resuming its quantitative easing scheme next month to inject life into the economy.

This month it surprised analysts by declining to use the remaining £25bn of £150bn made available to it by the Treasury for the programme, the efficacy of which is still a matter of debate.

Alan Clarke of BNP Paribas said: 'Speculation on whether the Bank of England would continue its QE program has aired towards the likelihood it will pause. This data means it is all open again.'

Construction was particularly badly hit, with the sector shrinking at a record annual rate, the ONS said. Output fell 2.2% over the quarter and is now 14.7% below the same period last year, the biggest fall since records began in 1948.

Production industry output - such as construction, mining and manufacturing - fell 0.7% between April and June, the ONS added.

The news helped instantly shave nearly 25 points from the FTSE 100, although the index, up 28.61 at 4,588.41 at 10.40am, remained on course for a 10th day of gains.



Edited by AvidFan

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Just wait until unemployment starts to have an impact. The supremo lagging indicator is a long way from peaking.

House prices are doomed.

As far as the GDP data goes--it comes as 0 surprise to me that it is almost 3 X as bad as foreceat by the, er, experts. These experts and EAs are out of touch with reality to think the biggest recession in history will go away in the shortest period of time in history.

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Better link for the sell-off here:


Andrew Sentance, an external member of the Bank’s interest rate-setting committee, gave an interview to Bloomberg, which was published 20 minutes after the government completed a £5 billion bond auction.

He said that in August the committee would be looking at ‘whether we’re now going to move into a phase where we’re watching and observing what happens in the economy’.

The comments raised expectations that the Bank is ready to pause its cash injections into the economy through the purchase of government bonds.

Scott Thiel, head of European fixed income at Blackrock, told the Financial Times: ‘This is one of the biggest single gilts transactions of all time, and the Bank jolts the market with significant market-moving information only minutes after the deal has been sealed.’

Benchmark 10-year gilt yields jumped 0.12% to 3.96% on the news that quantitative easing could be at an end.

Edited by AvidFan

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