UK economy under cosh of austerity, falling exports

By David Milliken and Fiona Shaikh

LONDON (BestGrowthStock) – Britain’s record recession was deeper than thought, data showed on Monday, and falling exports together with a government policy shift toward saving money rather than spending it pose a twin challenge for future growth.

Without state expenditure to prop it up, the economy would probably have shrunk again in the first quarter of this year, and net trade proved an unexpectedly large drag after exports fell at their fastest pace in a year and imports surged.

Britain’s first-quarter current account deficit with the rest of the world swelled to twice economists’ forecasts to hit its highest since the third quarter of 2007 and, in a first glimpse of second-quarter data, service sector output fell 0.3 percent in April.

“With fiscal austerity being stepped up, and consumer spending growth still falling, there is significant reason for concern over the UK’s growth prospects,” said James Knightley, economist at ING.

The pound fell further against the euro and the dollar after the data was released, and gilt futures pared losses as traders took the view that the data made a Bank of England interest rate rise more distant.

The BoE has repeatedly cited headwinds to growth as a major risk factor arguing against an imminent rise in interest rates.

Britain faces fiscal tightening that requires spending cuts of 25 percent over the next four years for departments other than health and overseas aid, plus benefit cuts and tax rises.

Overall economic performance in the past two quarters was the same as the Office for National Statistics had estimated on May 25, with 0.4 percent quarterly growth in the last three months of 2009, when the economy first emerged from recession, and 0.3 percent growth between January and March.

As part of a major annual revision of previous quarters’ GDP data, the ONS said that Britain’s economy contracted by 6.4 percent between the second quarter of 2008 and the third quarter of 2009, more than the 6.2 percent formerly estimated.

The fall was the biggest since quarterly records began in 1955 and wiped 22 billion pounds ($33 billion) off the economy — 2 billion more than previously thought.

Monday’s data also showed the first quarter was more dependent on government spending than initially estimated.

Government spending rose 1.5 percent on the quarter, three times faster than previously thought and at its fastest rate since the end of 2008 to add 0.4 percent to GDP.

Gross capital formation — mostly business investment — added 0.9 percent to GDP, more than offset by a 0.9 percent drag from net exports and 0.1 percent from a fall in household spending.


Despite the weak April services reading, which some economists said may be down to Iceland’s volcanic ash cloud disrupting air travel, analysts expect GDP may have grown faster in the second quarter of 2010, before slowing later this year.

“Surveys suggest that GDP should have expanded more strongly in Q2, perhaps by 0.5-0.6 percent. At the same time, though, the timeliest indicators of activity have leveled off or even started to weaken,” said Capital Economics’ Vicky Redwood.

Austerity moves in parts of the euro zone limit the prospects for growth driven by foreign demand for British exports, despite a boost to competitiveness from a fall of more than 20 percent in the value of the pound since mid-1997.

“Today’s releases highlighted the fragile nature of the recovery so far,” said Redwood. “We still doubt that the economy is in a good position to withstand the fiscal squeeze.”

The ONS gave little detail about the reason for a delay in the publication of GDP data from the planned date of June 30, which was announced less than 24 hours in advance because of “potential errors” in some of the figures.

“It would be misleading to say the effect fell in any one area,” an ONS statistician told reporters on Monday.

The current account balance showed a sharp swing into a deficit of 9.628 billion pounds or 2.7 percent of GDP.

“The figures are of course volatile on a quarter-to-quarter basis, but a current account deficit of this size at this stage of the cycle does not make for happy reading, especially at a time when the economy is supposed to be gaining a better degree of external balance,” said Investec economist Philip Shaw.

Most of the swing was caused by a big rise in foreign earnings on direct investment in the UK, which rose to 11.942 billion pounds from 4.253 billion, as foreign banks repatriated earnings after their British subsidiaries returned to profit.

The goods trade deficit edging up to 21.657 billion pounds from 21.108 billion, its highest since Q4 2008.

(Editing by Hugh Lawson; editing by John Stonestreet)

UK economy under cosh of austerity, falling exports