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Azad Zangana, European Economist, Schroders

UK Q2 GDP: Simply awful

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Azad Zangana, European Economist at Schroders comments on the news that the UK economy shrank by 0.7 per cent in Q2…

The Office for National Statistics (ONS) estimates that the UK economy has contracted by 0.7% in the three months to June 2012. The estimate confirms that the UK is now in its third quarter of its double-dip recession, making it the longest double-dip recession since records began. Compared to a year earlier, the national income is down 0.8%, but the cumulative decline in real GDP during this recession is just shy of 1.4%.
 
The results for Q2 GDP are poor to say the least. While the vast majority of economists had forecast another negative quarter, the final print was worse than even the most pessimistic forecast surveyed by Bloomberg. The ONS has explained that special factors have had a negative impact on the data. The extra bank holiday to celebrate Queen’s Diamond Jubilee means that the economy had lost a day of production/activity. In addition, the ONS points to the wet weather during the quarter, which appears to have impacted construction activity and retail sales. In addition, it is worth bearing in mind that these are still preliminary numbers that are subject to revisions. The ONS has little hard data on activity in June, when most of these special factors would have hit.
 
Looking ahead, we expect the UK economy to return to growth in the third quarter as most of the special factors that dampened activity in the Q2 reverse, but also thanks to an additional boost from London hosting the Olympic Games. The Olympics have helped lift employment through temporary jobs created for the games, but also additional working hours being made available in the retail sector thanks to the relaxation of Sunday trading laws. The extra demand from tourists visiting for the games should slightly offset the cost of the disruption to the local economy, but one of the big factors boosting GDP in Q3 will be the inclusion of money spent on tickets for the first time.
 
Nevertheless, the data is clearly showing more underlying weakness than we expected, especially in the service sector of the economy. We continue to forecast the economy to return to positive growth in the second half of the year, though we also forecast a return to recession in 2013, partly caused by the Eurozone debt crisis, but also partly caused by a lack of effective policy left available to the Bank of England. We expect the Bank of England to continue its quantitative easing programme beyond November, but we do not expect the programme to have a meaningful impact. As a result of the latest GDP figures, we have therefore cut our annual 2012 GDP forecast from -0.1%, to a very weak -0.5%. We have also cut our 2013 forecast from 0.7% to 0.5% growth, which is significantly lower than the latest consensus of 1.6%.”

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