U.K. Economy Seen Avoiding Triple-Dip Recession With 0.1% GrowthScott Hamilton
The U.K. economy probably narrowly avoided falling into an unprecedented triple-dip recession in the first quarter, economists said.
Gross domestic product rose 0.1 percent in the period, failing to recover the 0.3 percent decline in the fourth quarter of 2012, according to the median of 37 economists in a Bloomberg News survey. From a year earlier, GDP increased 0.4 percent, the survey showed.
While the U.K. may escape a recession, the recovery may struggle to gather momentum as weak demand in the euro area, Britain’s biggest export market, a fiscal squeeze at home and rising unemployment weigh on the economy. Fitch Ratings cut its rating on the U.K. to AA+ from AAA yesterday, citing a weaker economic and fiscal outlook.
“Whether the economy shrinks by a fraction or grows by a fraction is of little importance in the big picture,” said Vicky Redwood, chief U.K. economist at Capital Economics Ltd. in London and a former Bank of England official. “The main point is that the recovery will still look depressingly dismal.”
In its statement, Fitch lowered its 2013 and 2014 economic growth forecasts to 0.8 percent and 1.8 percent from 1.5 percent and 2 percent.
“The U.K. economy is not expected to reach its 2007 level of real GDP until 2014, underscoring the weakness of the economic recovery,” Fitch said. “The fiscal space to absorb further adverse economic and financial shocks is no longer consistent with an AAA rating.”
The pound extended a decline against the dollar after the Fitch statement and was trading at $1.5241 late yesterday.
Still, ratings changes are proving to be less important to investors, with sovereign yields moving in the opposite direction from what ratings suggested in 53 percent of 32 upgrades, downgrades and changes in credit outlook last year, according to data compiled by Bloomberg published in December.
The 10-year gilt yield has fallen 45 basis points since Moody’s Investors Service took Britain’s rating down to Aa1 from Aaa on Feb. 22.
The Fitch move “isn’t a surprise,” said Neil Jones, head of hedge fund sales at Mizuho Corporate Bank Ltd. in London. “The market has been expecting downgrades for months. Obviously you don’t want to see it happen but I don’t expect to see to investors exiting the U.K.”
BOE policy makers have split on the need for more quantitative easing to help the economy, with a push for more stimulus led by Governor Mervyn King defeated by a majority citing the threat of rising inflation expectations.
The central bank kept its target for QE at 375 billion pounds ($574 billion) on April 4. The majority of the Monetary Policy Committee said that medium-term inflation expectations had “drifted upwards” and further easing may exacerbate this.
MPC member Martin Weale, who voted with the majority, said in an interview on April 18 that there’s a risk of a “minor” first-quarter contraction and that easing inflationary pressures give “more room for maneuver” to expand stimulus.
The International Monetary Fund cut its U.K. 2013 economic outlook this week -- forecasting 0.7 percent growth -- and said the BOE should consider increasing stimulus. It also said Chancellor of the Exchequer George Osborne may need to ease the pace of budget cuts.
Forecasts in the Bloomberg survey for the first quarter ranged from growth of 0.3 percent to a contraction of 0.3 percent.
The April 25 report will be a preliminary estimate and based on about 45 percent of the data that will ultimately be available. It will have estimates for output in categories including production, services and construction. The second estimate on May 23 will include consumer spending and exports.
Redwood forecasts stagnation in the first quarter. While the data may not prompt the MPC to change their stance “unless it is a really bad figure,” confirmation of a recession may hurt sentiment and the government’s reputation, she said.
“‘Triple-dip’ headlines will not do much good for consumer and business confidence,” Redwood said. “And there are significant political implications of whether the U.K. is back in recession or not, especially after the IMF’s criticism of the U.K.’s austerity program.”
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