BQ Newsletter

Recession returns

Wednesday 25 April 2012 8:00

Britain is officially back in recession - its first double-dip since the 1970s.

The UK economy has officially fallen back into recession for the second time since the financial crisis after official data showed a dip in output in the first three months of 2012.

The Office for National Statistics said Britain's gross domestic product fell 0.2 percent in the first quarter of 2012 after contracting by 0.3% at the end of 2011, confounding forecasts for 0.1% growth

Most economists, reports Reuters, had expected Britain's $2.4 trillion economy to eke out modest growth in the early 2012, but these forecasts were upset by the biggest fall in construction output in three years coupled with anaemic service sector growth and a fall in industrial output.

The UK's economy shrank by 7.1% during the 2008-2009 recession and recovery since has remained slow. Today's data showed that output was still 4.3% below its peak in the first quarter of 2008, and the economy has only grown by 0.4% since the government came t o power in the second quarter of 2010.

Output in Britain's service sector - which makes up more than three quarters of GDP - rose by just 0.1 percent in the first quarter after falling 0.1% in Q4 2011, kept down by a fall in output in the large business services and finance sector.

Industrial output was 0.4% lower, while construction - which accounts for less than 8 percent of GDP - contracted by 3.0 percent, the biggest fall since Q1 2009.

Britain's Office for Budget Responsibility forecasts growth of 0.8 percent this year. Wednesday's data shows that first quarter output was no higher than a year earlier.

Here's how the private and public sector reacted to the largely surprising news:

Chancellor George Osborne: It's a very tough economic situation. It's taking longer than anyone hoped to recover from the biggest debt crisis of our lifetime," said Chancellor George Osborne. The one thing that would make the situation even worse would be to abandon our credible plan and deliberately add more borrowing and even more debt.

Shadow Chancellor Ed Balls: David Cameron and George Osborne complacently boasted their austerity plan had taken our economy out of the danger zone, but their failed policies have plunged us back into recession. And far from the eurozone being to blame for Britain's woes, it was only growth in the EU and the rest of the world which kept us from going into
recession earlier.

Ms Lee Hopley, chief economist at manufacturing organisation EEF: While manufacturing output appears to have gained ground in March, another quarterly contraction is a concern. However, the underlying health of individual sectors is particularly fuzzy at the moment, with a raft of surveys pointing to a modest improvement in manufacturing trading conditions in the first few months of the year. These figures are both a reminder of the big challenges facing the UK and world economies, and a confirmation of the patchy and unsteady recovery that had been expected.

John Cridland, CBI director-general: This disappointing news comes as something of a surprise. Since the turn of the year, business confidence has improved and, while still challenging, underlying economic conditions also appear to have strengthened. In particular, the weakness of the services sector data does not tally closely with a range of survey indicators suggesting that the sector has been picking up through the first quarter. Looking forward, there are indications that the economy is slowly recovering from the blow to confidence and activity which resulted from last autumn’s turmoil in Eurozone financial markets.

David Kern, chief economist at the British Chamber of Commerce: Business surveys, including the BCC’s Quarterly Economic Survey, have shown a more positive picture, and we believe these give a more accurate indication of the underlying trends in the economy. We think it is likely that the preliminary estimate will be revised upwards when more information is available. For the time being, the main priority is to minimise any possible damage to business confidence. These figures are at odds with the experiences of many UK businesses, which continue to operate with guarded optimism. But it is clear that economic growth in the UK remains much too low. We need to see a reallocation of priorities within Plan A that will bolster business growth. That means reducing regulation, encouraging exports and improving infrastructure. While the government must persevere with plans to reduce the deficit despite these figures, it must introduce more measures to empower businesses to drive recovery.

Chris Meredith, head of UK sales at the UK's largest office broker, I believe mentally the UK has never left recession. The only real change is that businesses have developed a set of tools with which to balance these pressures as best they can. Based on the feedback from our clients, the sense of recession has continued to guide their decisions and remained an important factor in their risk management. Put simply they have adapted as best they can in what continues to be a difficult time for UK PLC.

Tom Michaels, entrepreneur and founder of SME savings website, which has more than 20,000 members: If it is the case that the UK is back in recession then that is of course bad news. One of the biggest concerns our members have is the high tax environment in the UK. As a result of taxes on individuals, businesses are finding that their customers have less and less money to spend. When you combine this with corporation tax and VAT, SMEs are finding their margins squeezed like never before. If the government is serious about encouraging growth they need to cut taxes across the board and re-establish the right of individuals and companies to choose how to spend the money that they earn. The message from our members is loud and clear: biggest obstacle to growth in the UK is our high tax regime.

Fergus Trim, development director at Quorum Business Park, based in the North East of England: The 3% dip in the construction sector is a real issue behind the return to recession.  Let’s see new investment in infrastructure lead us back to growth, starting with upgrading the A1 and the new Tyneside conference centre.

Click here to view the full ONS figures.

More to follow...