The latest economic figures revealed the UK continues to underperform its European neighbours. This morning’s gross domestic product figure surprised on the downside by revealing the British economy did not, as widely expected, return to growth in the third quarter of 2009 but instead continued to contract, extending the UK recession to its longest on record.
The UK economy was predicted to have expanded by 0.2% over the third quarter, marking the end of the recession. But Friday’s preliminary reading showed the economy actually contracted by 0.4% over the period, bringing the year-on-year decline to 5.2%.
The peak to trough decline has now surpassed the 5.8% recorded during the recession of the early 1980s—this recession has now seen the UK economy drop 6.0% from peak to trough.
“The upshot of today’s figures is that the Chancellor is likely to have to downgrade the estimate for growth in 2009 by a full percentage point,” commented Charles Davis, senior economist with the Centre for Economics and Business Research (CEBR). Even if the economy were to expand by around 0.5% in the final quarter of 2009, the annual contraction would come in at 4.7%, which is still a notably weaker performance than the 3.25%-3.75% fall in output predicted in the Budget earlier this year.
“This has further implications for the worsening state of the public finances,” Davis continued, “with the recovery delayed, public borrowing could be closer to £200 billion than the £176 billion forecast by HM Treasury.”
It is worth noting, however, that this first estimate of third quarter GDP is likely to be upgraded as preliminary data are typically based on around just 40% of the final data the Office for National Statistics receives. Whether it will be upgraded enough to reveal the recession is in fact over waits to be seen.
Either way, this latest GDP figure supports the CEBR’s view that the UK economic recovery is likely to be “anaemic” and that substantial policy stimulus will continue. Davis believes an extension of the asset purchase facility is on the cards when the Bank of England reassesses quantitative easing next month. “A total of £250 billion asset purchases is ultimately what we expect,” Davis said, adding that the thinktank also sees interest rates remaining at 0.5% through 2010 and into 2011.
While none of the UK sectors recorded growth in the third quarter—indeed production output accelerated its contraction since the second quarter with a 0.7% decline in the third quarter—figures coming out of the euozone this morning point towards continued recovery in the euro area’s production and services sectors.
Eurozone purchasing managers’ index (PMI) readings marked improvements in both the manufacturing and services sectors during the month of October, with the former rising above the 50-point level that represents the boundary between contraction and expansion for the first time in 17 months. The economies of France and Germany led the manufacturing recovery.
And the eurozone’s services sector expanded further this month, achieving its highest reading in almost two years at 52.3, fuelled by a surge in the French index to 57.8.
“Today’s data firmly confirm the picture of steady economic recovery in the common currency area,” CEBR economist Jörg Radeke commented following the release. “With early indicators for sectors accounting for circa 70% of output in the common currency pointing toward continued output rises, the medium term prospects for the eurozone look better than for a long time.”
