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UK Economy Shrinks
Topic Started: 23 Oct 2009, 11:13 AM (186 Views)
Ryan
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U.K. Economy Shrinks, Dealing Blow to Brown
The Wall Street Journal
The U.K. economy saw a record sixth straight quarter of contraction between July and September, confounding economists' expectations that a deep recession was nearing an end and delivering a blow to the re-election hopes of Prime Minister Gordon Brown.

In its preliminary estimate Friday, the Office for National Statistics said that output fell 0.4% in the third quarter from the previous one and was 5.2% lower from the year-earlier period.

"The third-quarter [gross domestic product] data are a real shocker and desperately disappointing," says Howard Archer, chief European economist at IHS Global Insight in London.

U.K. government bonds gained as investors sought safety, while the pound dropped to a day's low of $1.6484, from above $1.66, and the euro climbed to a day's high of £0.9115 after the data release.

Economists had expected the U.K. to grow by 0.1% in the third quarter, which would have been the first three months of growth since the start of 2008. While economists have pushed their growth forecast back to the fourth quarter, most also expect that any recovery will be weak. Next year the economy faces the withdrawal of economic stimulus measures and a likely round of public-sector cuts and tax rises as the government seeks to pare down record debt.

The ONS said there had been a peak-to-trough decline in output of 5.9% since the recession began in the second quarter of 2008. That is just short of the 6% peak-to-trough decline recorded in the recession of the early 1980s, the ONS said. But this quarter's decline makes this the longest recession the British economy has experienced since records began in 1955.

The fall pits the U.K., the world's sixth-largest economy, as a laggard among its peers. France, Germany and Japan all saw a return growth in the second quarter and the U.S. is expected to follow suit when it reports its first estimate of third-quarter GDP numbers next week.

The output decline creates more problems for Mr. Brown's Labour government, which has pitted itself as the right team to lead the U.K. out of recession and believes that a return to growth will boost its fortunes ahead of an election that must be called by next June. The government trails the opposition Conservative Party by as much as 17 percentage points in opinion polls.

Opposition parties jumped on the dismal figures. "This news has destroyed Labour's claim that Britain was better placed than other countries to weather the storms," said George Osborne, the Conservatives' finance spokesman.
[Gordon Brown]

Gordon Brown

U.K. Treasury Chief Alistair Darling said after the release of the data that "we've always said that we remain cautious as a result of the high degree of economic uncertainty."

The numbers showed that all parts of the British economy are still weak. The biggest drag on growth came from the distribution, hotels and restaurants section, which helped produce a 0.2% decline in the service sector, the engine of the U.K. economy.

The total drop in production industries in the third quarter was 0.7%. Following Friday's news, economists began to revise their figures. IHS Global Insight now expects GDP to fall by 4.7% in 2009 rather than the 4.4% drop that it had previously expected.

Going forward, the U.K. economy faces significant hurdles to sustained growth. Unemployment is at 7.9% and in early-2010 the restoration of value-added tax to 17.5% from 15%, an increase in a social security tax and an increase of five percentage points to 50% in the income tax of the highest earners will couple with a program of spending cuts that will take money out of the British economy.

Underscoring how painful a reduction in government spending is likely to be, Friday's figures showed that the public sector had been the only area of the economy with any life, with growth flat for the quarter after a decrease of 0.2% in the previous three months.

"It is becoming increasingly clear that the recovery, when it does begin, will be slow and bumpy," said Hetal Mehta, an economist at the Ernst & Young ITEM Club of economic forecasters.

On Tuesday, Britons were given a reminder of just how much debt the country needs to pay off when official figures showed a 128.5% year-to-year jump in borrowing to a record £77.3 billion ($128.48 billion) in the first half of this fiscal year.

The poor numbers also led political rivals to question whether the estimated trillion pounds that has been spent or put on the line to stimulate the economy and partly added to the country's debt pile has actually done its job.

While measures such as the £37 billion cash injection into failing banks is widely seen as having successfully stopped a wider collapse in the banking system, some measures, such as a guarantees for small business loans an and a trade insurance program have seen little take up and retail executives have questioned whether a cut in the value-added tax was successful.

The poor growth figures stoked speculation that the Bank of England would maintain and potentially increase the quantitative easing policy it uses to increase the money supply in the economy.

Write to Alistair MacDonald at alistair.macdonald@wsj.com and Laurence Norman at laurence.norman@dowjones.com


Well at least the UK can't lie to itself and say it's recovered, now if only we can just do the same.
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Benthamus
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I believe I saw an article in the Telegraph (UK) that stated Italy's economy has overtaken Britains or something along those lines. The Italian economy seems to be in shambles on a regular basis so if this article is true Britain will need a Prime Minister who is revolutionary in ideas to fix the problem. By the way Britain is in a worst position that what it was in during 1979.
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Lundymaphone
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Yes well hopefully this will force the UK to dissemble its nanny state...god I hope it does, then the EU is the next big challenge.
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Alexander L. Roosevelt
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All Indicators I know of tell me that we are on the upswing. But up is just the reverse of the way you came, so of course its still going to look bad at the moment. If we spiked quickly back up, that means something is REALLY wrong.

Disclaimer: I have no real experience with economics, but analyists I trust both in the Media and among people I know have told me that we're out of the worst. The second part is just common sense.
Edited by Alexander L. Roosevelt, 24 Oct 2009, 07:23 PM.
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Richard
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A lot of the normal indicators don't really apply in this case, I don't think. I won't trust them until all the emergency subsidies and bail out money goes away.
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Benthamus
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From the news and information I've gathered most of the industrialised world is in recovery (Australia being in one of the best positions), however the UK is in recession. They have been hit really bad from the GFC, but I believe their economy wasn't going so well beforehand due to things like Northern Rock (A bank that went under before the GFC).
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Lundymaphone
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Well one thing to remember is that the UK relied on the worlds' financial system far more then any other major industrialized nation so they have been the hardest hit and will be the last to come out of it in the end. Like Ben alluded too countries like Australia and Canada are in the best shape simply because neither had major bank failures hell most Canadian banks made a profit last year, albeit a substantially smaller one...The UK has many long term economic issues such as that massive public debt (which is the highest in the world per/cap I believe). Frankly the UK seems too be on the path to a rocky 20-30 years.
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Benthamus
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Australia's banks made profits as well if I recall correctly. I remember in my economics lecture it was because they weren't allowed to get involved as deeply in dodgy loans like what US banks were essentially forced to do.
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Lundymaphone
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Yes canadian banks were largely not allowed too participate in the American lead debacle. But really what saved Canadian banks was that the banking "culture" up here is far more conservative in it's lending/purchasing of assets. Ya that massive regulation in the 90's is finally starting to burn.
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