GDP down 0.7 per cent as UK economy slips deeper into recession

The UK economy contracted by 0.7 per cent in the 2nd quarter of 2012, double the shrinkage in the economy that most analysts were predicting.

The fall in the three months between April and June is the same as the two previous quarters combined and points to an acceleration of the UK’s double-dip recession. In the final quarter of 2011, the economy shrank by 0.4 per cent and in the first quarter of 2012 the contraction was 0.3 per cent.

Joe Grice, the Office for National Statistic’s chief economist said that the impact of the extra bank holiday for the Queen's Diamond Jubilee is unquantifiable without “further experience against which to judge.

He said: “The margins of uncertainty of the preliminary estimate are therefore a little bit greater than usual because of these specific and unavoidable uncertainties. The scope for future revisions is a little bit greater than normal.

“The underlying performance of the economy was probably somewhat better than the headline figure of minus 0.7 percent would suggest."

Today’s figures are the first estimate of GDP and could be revised and include only the output side of the economy. The 0.7 per cent contraction represents the deepest quarterly fall since the first quarter of 2009.

However, they are dire news for the government and the chancellor, George Osborne, in particular and will provide plenty of ammunition for the Labour party to attack his economic strategy of austerity that has not produced growth.

The government will come under increasing pressure to abandon its strategy of cuts and to focus on infrastructure and growth initiatives.

Earlier this month the International Monetary Fund warned that the UK said "further monetary stimulus is required” and that the government should consider "scaling back" its fiscal tightening if there is no sign of growth by the end of the year.

There were steep falls in manufacturing and construction activity and even the vital services sector showed a marginal contraction overall.

Howard Archer, Chief UK & European Economist at IHS Global Insight said: “This really is a very nasty surprise indeed.

“Plunging construction and manufacturing output weighed down heavily on the economy while service sector activity also contracted marginally.”

Glenn Uniacke, from Moneycorp said: "The UK, like most other nations, has too much debt, no growth plan and, with the Eurozone crisis, is operating against a brutal economic backdrop.

Output in the construction sector fell by 5.2 per cent in the second quarter, compared to the first three months of the year. Production output including manufacturing fell by 1.3 per cent, whilst the services sector slipped to a 0.1 per cent contraction.

The Queen’s Diamond Jubilee bank holiday contributed to the fall in economic output and the dreadful weather will have had an effect. However, the weather is likely to have had more of an impact on the expenditure side of the economy, which is not included in the today’s first estimate of GDP.

Howard Archer added: “While part of the GDP contraction in the second quarter can be attributed to lost activity from the extra day’s public holiday and to the very wet weather hitting retail sales and construction output, the economy’s weakness clearly runs far deeper than that.”

The data will add to the possibility of more quantitative easing from the Bank of England or even an interest rate cut from base rate’s record low of 0.5 per cent.

However, Ranvir Singh, CEO of the market analysts RANsquawk believes this policy is having little effect.

He said:"After three consecutive quarters of contraction, and with little obvious plan for growth, the Bank of England's QE programme is looking increasingly impotent in the face of weak consumer demand and a flailing construction sector.”

The one source of optimism is that the Olympic Games will provide a big boost to the UK economy in the third quarter and help to push the UK towards an overall annualized leveling out of GDP by the end of 2012. However, this is looking less likely after today’s terrible figures.

Howard Archer commented: “The economy should be able to return to growth in the third quarter, helped by the Olympics. Consequently, we expect UK GDP to contract by around 0.5% overall in 2012.”

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