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UK economy shrinks 2pc in Q1

London, May 23, 2009

Britain's economy shrank at its sharpest pace since 1979 in the first three months of the year, according to a report.

Households slashing spending at the fastest rate since 1980 and firms using up stocks at a record pace, said the report in our sister publication, the Gulf Daily News.

With analysts arguing the worst is probably now over for British gross domestic product (GDP) figures, debate has turned to when growth might return and how sustained the recovery will be, though most expect monetary policy to stay loose for a long time.

The Bank of England is highly uncertain about the future prospects of the economy, indicating growth could restart around the turn of the year but cautioning there could be more weakness to come if banks don't increase lending.

The Office for National Statistics' second estimate of economic activity showed GDP fell 1.9 per cent on the quarter, its biggest drop since the third quarter of 1979. That was unrevised from the previous reading and in line with forecasts.

On the year, GDP fell 4.1 per cent - the biggest fall since the last quarter of 1980.

"While the UK economy may have passed the absolute low point of this recession, any recovery is likely to be built on pretty fragile foundations," said Jonathan Loynes, chief European economist at Capital Economics.

Prime Minister Gordon Brown's Labour government is banking on an economic turnaround by the end of the year to help revive its political fortunes and to justify massive taxpayer-funded support to the banking sector and the broader economy.

After scandals over politicians' expenses and mooted smear campaigns at the heart of government, economic recovery could represent Labour's only chance of holding on to power at an election due by the middle of next year.

There were several factors in the second estimate of GDP to support the view that a sustained recovery may not come in time.

On the expenditure side, only government spending made a positive contribution and household spending fell 1.2 per cent on the quarter, the biggest drop since 1980.

Consumers are clearly suffering from soaring unemployment, a weak housing market and a dearth of credit.

A record fall in employees' compensation - an umbrella measure of pay - suggests that consumer spending will remain subdued for some time to come.

And, despite a weak pound, overseas demand for British goods is slumping - down 8.3 per cent in the first quarter.

Policymakers have made clear a sustained domestic recovery is contingent on an improvement in global conditions.

"It is likely to be a long time indeed before the UK returns to a period of robust and steady expansion," said Colin Ellis, European economist at Daiwa Securities.

Inventories fell by their biggest amount on record, contributing 0.6 percentage points to the quarterly decline in GDP.

Some analysts suggested this could represent the peak of firms using up stocks to meet orders, indicating that future GDP figures may be less negatively affected by inventory changes.

"We are going to see further falls in the coming quarters but at a slower rate, so paradoxically that will actually add back to GDP growth," said Brian Hilliard, an economist at Societe Generale.

But, without a surge in orders, that could be a false dawn.

"The bottom in economic activity may not be too far off," BoE deputy governor Charles Bean said. – TradeArabia News Service




Tags: stocks | London | Bank of England | GDP | Q1 |

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