April 26 (Bloomberg) -- Prime Minister David Cameron’s government is bracing itself as the first U.K. recession since he took office threatens to deliver a shock to confidence.
As the premier persists with the fiscal squeeze that has defined his administration, he now faces twin dangers from political fallout and economic damage. While Cameron insists his austerity program has kept U.K. government bond yields low and aided the economy, he said yesterday that a 0.2 percent first-quarter contraction was “very disappointing.”
“The headlines all over the place will do damage to confidence,” said Brian Hilliard, an economist at Societe Generale in London, who was the only one of 40 economists in a Bloomberg News survey to correctly forecast the outcome. “It will increase the pressure on Cameron at a time when he’s making many missteps on other issues.”
News of a double-dip recession and the threat it poses to sentiment among consumers and businesses risks compounding the woes of the Conservative premier after a month when the opposition Labour Party increased its lead in opinion polls. Cameron is nursing the fallout from negative reaction to his tax cuts for the rich and countering suggestions that the government improperly favored News Corp. in a takeover battle.
Bank of England policy maker David Miles signaled in an interview this week that a renewed slump could hurt sentiment, a concern echoed yesterday by the Confederation of British Industry, the nation’s biggest business lobby. A drop in confidence could prompt companies to rein in investment and consumers to curtail spending.
Nationwide Building Society said today that its consumer confidence index rose to a nine-month high of 53 in March from 44 in February. Still, the increase in the measure, based on a survey conducted Feb. 20 to March 25, could be “short-lived.”
The GDP data are “likely to damp sentiment in the near term, both in terms of consumers and in terms of businesses,” said Nationwide Chief Economist Robert Gardner. “The fact the economic backdrop is still very difficult is clearly going to be the main thing holding back spending.”
The Office for National Statistics said yesterday the economy shrank in the three months through March as construction slumped 3 percent, the most in three years. In addition, services, the biggest part of the economy, grew just 0.1 percent. The report was preliminary and the data may be revised.
Bank of England Deputy Governor Paul Tucker was among officials and economists warning that a construction slump could lead to a drop in gross domestic product. Policy makers said in the minutes of their April meeting that the economy could shrink in the first and second quarters, undermining confidence “even if the underlying pace of economic expansion were stronger.”
CBI Chief Economic Adviser Ian McCafferty said that even if the statistics office revises the GDP number up, the damage to confidence may already be done.
“There is clearly a risk” the negative data could affect business sentiment “given that confidence is still fragile,” he said in London. While a CBI index published yesterday showed that manufacturing sentiment rose to the highest in two years in April, McCafferty said the outlook “will remain uncertain until the euro-zone crisis is resolved.”
GlaxoSmithKline Plc, the U.K.’s largest drugmaker, reported first-quarter profit and sales yesterday that missed analyst estimates as revenue declined in a “challenging” Europe.
Cameron and Chancellor of the Exchequer George Osborne have lost public support over their March 21 budget, which voters say helped the rich at the expense of pensioners and charities, and the handling of a threatened strike by tanker-truck drivers. Their Conservative-led coalition is also under fire for ministerial ties to Rupert Murdoch’s News Corp. The opposition Labour Party led the Tories by 41 percent to 33 percent in an ICM Ltd. poll published yesterday.
In response to accusations in Parliament yesterday from Labour lawmakers that he is out of touch with the concerns of ordinary Britons, Cameron said that the U.K. now faced “a very tough situation that, frankly, just got tougher.” He still pledged to stick to his deficit-cutting plans.
Cameron will use a speech in London today to highlight Britain’s ability to attract investment and say that renewable energy companies have invested 4.7 billion pounds ($7.6 billion) in the U.K. in the past year, supporting 15,000 jobs. He will also announce new contracts worth 350 million pounds and 800 jobs, according to a statement released by his office.
Britain was hit hard by the financial crisis and GDP is still 4.3 percent below its pre-recession peak at the end of 2007. It means the British economy has had its longest peacetime slump for a century. Each of the four previous recessions since the 1920s saw output return to pre-slump levels within four years, according to the National Institute of Economic and Social Research.
The latest setback to the recovery adds to the case for the government to pull back from its austerity program, said Chris Scicluna, head of economic research at Daiwa Capital Markets Europe in London and a former U.K. Treasury official
“That would be the appropriate thing to do, but would represent a significant political U-turn and one that would be very uncomfortable for him to engineer,” he said. “You can defend it in terms of the economy but it would suggest that his strategy was misplaced.”
Cameron said his policy is supporting the economy by keeping government bond yields low and that abandoning austerity would trigger a loss of confidence among international investors and push up borrowing costs. The yield on the 10-year gilt was at 2.16 percent as of 8:47 a.m. in London. That compares with an average 3.75 percent over the last five years.
“The austerity plan is the coalition’s economic raison d’etre,” said Simon Wells, chief U.K. economist at HSBC Holdings Plc in London and a former Bank of England official. “I don’t see them abandoning that easily, and they have at least until the autumn statement in November to hope that things improve.”
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