Double-Dip Recession Fears for the UK

 

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  • A technical recession is recorded by two consecutive quarters of negative quarter-on-quarter real GDP growth. According to estimates from UK national statistics, the economy contracted by 0.2% quarter-on-quarter (seasonally adjusted) following a contraction of 0.3% in Q4 2011; 
  • However, Euromonitor International projects stronger underlying growth in Q1 2012 with 0.1% real GDP growth quarter-on-quarter (seasonally adjusted), which would mean that the UK would narrowly miss a return to technical recession.

UK Quarterly Real GDP Growth: Q1 2008 – Q4 2012 % growth quarter-on-quarter (seasonally adjusted)

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Source: Euromonitor International

Note: 2012 figures are forecasts

Implications

The news of a potential double-dip recession will likely have more of a psychological impact:

  • The government is struggling to stimulate economic growth amid unpopular austerity measures and government spending cuts, aimed at reducing the budget deficit. The general government budget deficit stood at 8.4% of GDP in 2011, nearly three times higher than the 3.0% of GDP deficit ceiling recommended by the EU;
  • The manufacturing sector has been lacklustre as global demand has weakened while uncertainty in the eurozone region as the sovereign debt crisis rumbles on will also continue to impact UK export demand. The manufacturing sector accounted for 10.2% of GDP in 2011 while 57.1% of UK exports were destined for the EU-27 in 2011;
  • Fears about double-dip recessions will have the biggest negative impact on consumer confidence. Consumer confidence is of paramount importance to the economy as consumer expenditure accounted for 61.1% of GDP in 2011;
  • However, the UK economy is in a stronger position since the recession in 2008-2009 with more robust underlying growth in Q1 2012. The UK experienced five consecutive quarters of negative real GDP growth in 2008-2009 peaking in Q4 2008 with a severe contraction of 2.3% quarter-on-quarter (seasonally adjusted);
  • Furthermore, trade sources indicate an upturn in business confidence in the first quarter of 2012 while national statistics reported a mild drop in the unemployment rate to 8.3% of the economically active population during December 2011 to February 2012 from 8.4% in the previous quarter.

Prospects

Although Euromonitor International forecasts that a double-dip recession will be avoided in Q1 2012, the outlook for the year overall remains subdued and a protracted recovery is expected.

  • The biggest risk to the UK economy is a further weakening of consumer confidence. As consumers continue to deleverage and real income growth remains weak, Euromonitor International forecasts per capita consumer expenditure to fall by 1.3% in real terms annually in 2012 before recovering to 1.4% real growth in 2013;
  • Inflation is set to remain above the Bank of England target rate of 2.0% throughout 2012. Euromonitor forecasts annual inflation to average 3.2% per month over April-December 2012 (seasonally adjusted) with global oil prices also elevated owing to ongoing international tensions with Iran;
  • Euromonitor International anticipates real GDP growth of 0.1% for 2012 on an annual basis before a stronger rebound of 1.8% takes place in 2013.

Real Growth in UK GDP, Per Capita Consumer Expenditure and Per Capita Annual Disposable Income: 2007-2013 % annual real growth

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Source: Euromonitor International from national statistics/Eurostat/UN/OECD/International Monetary Fund (IMF), World Economic Outlook (WEO)

Note: 2012 and 2013 figures are forecast