British crisis deepens with 'terrible data' worse than lowest predictions
Britain's economy shrank far more than expected in the second quarter, battered by everything from an extra public holiday to government spending cuts and the neighbouring eurozone crisis.
UK Finance Minister George Osborne said figures released yesterday showed Britain had "deep-rooted economic problems", adding that the slump in the second quarter was disappointing even when taking into account one-off factors that hurt.
Britain's gross domestic product fell 0.7pc compared with the first three months, the sharpest fall since the height of the global financial crisis in early 2009, the Office for National Statistics said, showing a bigger drop than any of the economists surveyed in a Reuters poll last week had expected.
Output in Britain's service sector -- which makes up more than three-quarters of GDP -- contracted by 0.1pc in the second quarter after growing 0.2pc in Q1 2012.
Industrial output was 1.3pc lower, while construction -- which accounts for less than 8pc of GDP -- shrank by 5.2pc, its biggest drop since the first quarter of 2009.
The figures confirmed that Britain remains mired in its second recession since the start of the financial crisis, with the economy shrinking for a third consecutive quarter.
The broad-based slump will fuel pressure on the government to get the economy growing again.
However, Mr Osborne believes he has no money left for a meaningful spending boost, having staked his reputation on a tough plan to eliminate a budget deficit, still around 8pc of GDP. The lack of growth also puts this goal into question.
Sterling hit its lowest in nearly two weeks against the dollar after the data, and two-year government bond yields hit a record low on speculation that the Bank of England may have to provide more economic stimulus than expected.
The central bank has already embarked on another £50bn (€63.8bn) programme of gilt purchases with newly created money to soften a grim economic outlook, but the dismal numbers boosted speculation that it may cut interest rates later this year.
"This is terrible data. Frankly there's nothing good that comes out of these numbers at all," said Peter Dixon, an economist at Commerzbank.
Britain is due some kind of boost over the coming months as production looks set to rebound from the hit from the extra public holiday to celebrate Queen Elizabeth's Diamond Jubilee in June, and from the ticket sales and visitors' spending during the Olympics.
But the overall outlook remains poor.
Many Britons have reined in spending since the crisis and businesses are holding back investment as the lack of demand and fears about the spillovers from the eurozone crisis weigh on confidence, with the lack of credit hurting smaller firms.
"There are a great many so-called 'zombie businesses' teetering on the edge," said Julie Palmer of business recovery and restructuring specialist, Begbies.
Last week the International Monetary Fund slashed its growth forecast for Britain by more than those for any other advanced economy, and warned the government and BoE that they will need to rethink their approach if the economy fails to pick up by early next year.