U.K. Teeters on Brink of Recession as BOE Weighs EasingScott Hamilton and Jennifer Ryan
The U.K. economy shrank more than economists forecast in the fourth quarter as manufacturers cut output and services stagnated, leaving Britain on the brink of another recession
Gross domestic product fell 0.2 percent from the third quarter, when it increased 0.6 percent, the Office for National Statistics said in London today. The median forecast of 33 forecasts in a Bloomberg survey was for a drop of 0.1 percent. Public-sector strikes over pensions on Nov. 30 had “some impact” on GDP in the quarter, the statistics office said.
Bank of England Governor Mervyn King said yesterday that policy makers can increase stimulus again if needed to guard against a “renewed severe downturn.” The U.K., the first Group of Seven nation to report fourth-quarter data, may not be the last to report a contraction. Germany’s statistics office estimated GDP fell about 0.25 percent in the period and the International Monetary Fund has forecast a euro-area recession.
“While a technical recession cannot be ruled out, the signs are that the economy is turning the corner slowly,” Barclays Capital economist Blerina Uruci in London wrote in an e-mailed note today. “Nevertheless, with the euro crisis grinding on, the near-term outlook remains precarious.”
The pound pared its decline against the dollar after the GDP report and was trading at $1.5561 as of 12:32 p.m. in London, down 0.4 percent on the day. The yield on the 10-year U.K. government bond fell 1 basis point to 2.17 percent.
In the euro area, German business confidence jumped more than economists forecast in January to a five-month high. The Ifo institute’s business climate index climbed to 108.3 from 107.3 in December. Economists predicted an increase to 107.6, according a Bloomberg News survey.
The U.K. is also showing “tentative” signs of recovery, according to the Confederation of British Industry. Its index of factory orders rose in January to a four-month high of minus minus 16 from minus 23. An outlook gauge also increased.
Bank of England policy makers voted unanimously this month to keep their target for bond purchases unchanged, with some officials saying more stimulus is “likely,” minutes published today showed. The central bank’s current program of so-called quantitative easing is due to be completed early next month.
Federal Reserve policy makers conclude a two-day meeting and will release a statement at 12:30 p.m. in Washington. The central bank will also publish forecasts from Federal Open Market Committee participants for the main interest rate, and Chairman Ben Bernanke plans to hold a press conference.
European stocks fell for a second day after Ericsson AB and Novartis AG posted earnings that missed analysts’ estimates. The benchmark Stoxx Europe 600 Index slipped 0.8 percent, while the FTSE-100 Index fell 0.7 percent. Futures contracts on the Standard & Poor’s 500 Index expiring in March lost 0.3 percent.
In Asia, the Bank of Thailand cut interest rates for a second straight meeting to help spur a recovery from the nation’s worst floods in almost 70 years and counter moderating external demand.
Japan recorded its first annual trade gap since 1980 last year, driven by an energy-import surge as nuclear plants shut down and by a shift of manufacturing overseas. A third straight monthly merchandise trade deficit in December capped an annual shortfall of 2.49 trillion yen ($32 billion), the finance ministry said in Tokyo.
The U.K. data showed that industrial production fell 1.2 percent in the fourth quarter, with manufacturing contracting 0.9 percent, the most in more than two years. Construction shrank 0.5 percent, while services stagnated. In 2011, GDP rose 0.9 percent versus 2.1 percent in 2010.
With the government constrained by its pledge to all but eradicate a budget deficit of 9 percent of GDP, pressure is growing on the Bank of England to expand its 275 billion-pound ($429 billion) bond-buying program.
“With inflation falling back and wage growth subdued, there is scope for interest rates to remain low, and, if necessary, for further asset purchases, to prevent inflation falling below the 2 percent target,” King said late yesterday.
Turmoil in the euro region, rising unemployment and government austerity measures are sapping confidence in an economy that has recovered barely a half of the output lost during the 2008-2009 recession, which was the deepest since World War II. Only the recoveries in Japan and Italy are further behind among Group of Seven nations.
The IMF cut its 2012 U.K. growth forecast to 0.6 percent from 1.6 percent yesterday. Ernst & Young meanwhile says the U.K. economy may contract again the first quarter, marking its first double-dip recession in more than three decades.
“These are disappointing figures about what happened to the economy at the end of last year, but they are not entirely unexpected because of what’s happening in the world,” Chancellor of the Exchequer George Osborne said, referring to the GDP data. “Britain has substantial economic problems. But the truth is that dealing with those problems is made more difficult by the situation in the euro zone.”
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