Olympic stimulus fails to snap U.K. out of recession

The Office for National Statistics said the British economy contracted by a quarterly rate of 0.7 per cent last quarter, much worse than the 0.2 per cent expected decline.
Commuters board a train at London's Holborn tube station. The British recession deepened last quarter, new data showed Wednesday. (Ki Price/Reuters)

Britain is suffering a far deeper recession than thought, official figures showed Wednesday in a development that is likely to increase the pressure on the government to ease up on its tough austerity approach.

The Office for National Statistics said the British economy contracted by a quarterly rate of 0.7 per cent in the second quarter of the year. That was way more than the expectation in the markets for a far more modest 0.2 per cent decline, and confirmed that the British recession has run into a third quarter.

The statistics office said the quarter was likely depressed by an extra day's holiday in June to celebrate the 60-year reign of Queen Elizabeth II. The wettest quarter since records began over 100 years ago is unlikely to have helped either.

Despite the caveats, the figures are likely to be big blow to the Conservative-led coalition government, which on entering office a little over two years ago put deficit-reduction at the heart of its economic program. Many, particularly the opposition Labour Party, think the medicine has been too much and choked the life out of the British economy, which is Europe's third-largest.

Austerity questioned

"We don't expect much policy response from government after today's news, though pressure will grow for a change of direction," said Scott Corfe, senior economist at the Centre for Economic and Business Research.

British Treasury chief George Osborne again blamed the economy's problems on debts run up by the previous Labour government and the impact of the Eurozone crisis.

"We all know the country has deep-rooted economic problems and these disappointing figures confirm that," Osborne said.

Last week, the International Monetary Fund said Prime Minister David Cameron's government may have to ease up on budget cutting if the economy fails to rebound strongly. The IMF cut its forecast for U.K. growth this year to 0.2 per cent from 0.8 per cent.

A more detailed look at the figures showed all sectors contributing to the quarterly decline. Output from the service industries including the financial sector was down 0.1 per cent, manufacturing and other production industries were down 1.3 per cent and construction fell 5.2 per cent.

Britain has been in recession for much of the last four years. Like much of the world, it suffered a deep 18-month recession following the financial crisis. That only ended in the last quarter of 2009. Since the fourth quarter of 2009, GDP has fallen in five of the last seven quarters, and the latest result was the sharpest drop during that time. The technical definition of a recession is two successive quarters of decline.

The figures are at odds with other economic indicators. Unemployment has eased to 8.1 per cent in the last report, with 250,000 private sector jobs added in the three months through April. Forward-looking surveys of business sentiment have been upbeat too.

"We can think of no reason why companies would be taking on staff at such an impressive rate if the economy really was collapsing to the extent that the GDP numbers suggest," said Chris Williamson, chief economist at financial data company Markit.

Other analysts suggest that employment enjoyed a short-term boost from hiring to support the Olympic Games.