King Confronts Triple-Dip Risk as Snow Freezes U.K.Scott Hamilton
Britain’s cold snap and its echoes of previous winter disruption risk leaving Bank of England Governor Mervyn King with the danger of a triple-dip recession just as he counts down his final months in office.
Heavy snow affecting most of the country threatens to hurt retail sales and construction after a contraction forecast by economists for the last three months of 2012. King, due to be replaced by Bank of Canada Governor Mark Carney in July, may provide details of his outlook when he delivers his first speech of 2013 to business executives in Belfast this evening.
Poor weather will add to the one-time factors that have hit the U.K. over the past year and which King says have led to a “zig-zag pattern” of output. The fourth-quarter slump is partly due to the unwinding of a boost to gross domestic product in the previous three months from the London Olympics. Prior to that, an extra public holiday for the queen’s jubilee dragged the economy into another contraction in the second quarter.
“The longer the bad weather goes on, the more activity it will bleed away and unfortunately the greater the probability of a triple dip,” said Phil Rush, an economist at Nomura International Plc. “This is still just part of the zig zag and the broad underlying picture is one of no growth.”
Data on Jan. 25 will show GDP fell 0.1 percent in the fourth quarter after the economy resumed expansion in the third, according to a Bloomberg News survey. Economists define a recession as two quarters of declining economic output and a contraction in the fourth and first quarters would be the third slump since GDP reached its peak before the financial crisis.
The Confederation of British Industry’s factory index for January fell to minus 20 from minus 12 in December, according to a report released today. That compares with the median forecast of economists in a Bloomberg survey for an increase to minus 11. King will speak at 7:45 p.m., when he will address the CBI’s Northern Ireland Mid-Winter dinner.
The weak economy is undermining government plans to reduce the budget deficit and pushing up borrowing costs. The budget gap excluding support for banks widened to 15.4 billion pounds ($24.4 billion) in December,from 14.8 billion a year earlier. Spending rose 5.4 percent and revenue climbed 3.6 percent.
Former Bank of England policy maker Adam Posen today criticized Chancellor of the Exchequer George Osborne’s deficit-cutting policy.
“I am on record now as saying the chancellor is overly aggressive in his plans of austerity at present,” Posen said in testimony to lawmakers.
The pound rose 0.2 percent against the dollar today and was trading at $1.5865 as of 11:29 a.m. in London. Ten-year gilt yields were at 2.05 percent after touching 2.14 percent on Jan. 4, the most since April 30. They fell to a record low 1.407 percent in July.
Tomorrow, the statistics office will publish labor-market data forecast to show the unemployment rate remained at 7.8 percent in the quarter through November. The Bank of England’s Monetary Policy Committee will release the minutes of its January decision, when officials voted to hold their bond-purchase program at 375 billion pounds.
The U.K.’s Met Office forecasts that a mix of rain, sleet and snow will continue to fall in south west England today, with heavy snow likely in parts of the north. Wintry conditions will continue through the rest of the week and temperatures are not expected to rise much above freezing during the day.
In the second quarter of 2012, record rainfall contributed to an economic contraction, while the coldest December in a century at the end of 2010 helped to drag GDP down by 0.5 percentage points in the fourth quarter of that year. The Office for National Statistics said at the time that growth would have been “flattish” without the impact of the weather.
The National Institute of Economic and Social Research estimates that the economy shrank 0.3 percent in the fourth quarter. The institute said the estimate is “distorted due to an artificially high level of output” in the third quarter, and removing these suggests an underlying performance “best described as flat.”
While one-time factors are at play, negative coverage of a drop in GDP risks undermining sentiment and further hampering the recovery. Bank of England Deputy Governor Charlie Bean said of the fourth quarter in a Bloomberg News interview in November that “if the press choose to portray it as ‘Britain back in recession,’ that clearly may end up having some adverse effects on business confidence.”
“The fact we’re talking about a triple dip suggests we’re becoming a bit more used to this sort of low growth volatility,” said Ross Walker, an economist at Royal Bank of Scotland Group Plc in London. The snow is “coming at a bad time for the economy. If GDP was growing at 0.7 to 0.8 percent a quarter, it wouldn’t matter so much.”
Economists in a Bloomberg survey published on Jan. 17 see the economy growing 0.2 percent this quarter. They forecast a full-year expansion of 1.1 percent after an estimated 0.1 percent contraction in 2012.
“With the bad weather looking set to continue well into this week and possibly beyond, the threat to the economy and risk of a triple-dip recession is growing,” said Howard Archer, an economist at IHS Global Insight in London.
Archer said the impact from snow disruption will be felt most in the construction industry as workers are forced to down tools and by retailers. There will also be an impact on other businesses as workers stay home and supply chains are interrupted, and on airlines and freight companies, he said.
London’s Heathrow Airport, Europe’s busiest hub, scrapped around 200 flights yesterday, about 15 percent of the total, after grounding 260 the day before.
“Whether it’s a marginal two consecutive quarters of decline or not doesn’t change things too fundamentally,” said Rush at Nomura. “Although, it does effect the general population’s perceptions and thus probably has more political ramifications than economic ones.”