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UK recession confirmed by shock 0.7% slump: Keynes would shudder

UK recession confirmed by shock 0.7% slump: Keynes would shudder

GDP figures have confirmed the UK economy contracted for the third quarter in a row with a much steeper than expected 0.7% decline in the second quarter.

The shock follows contractions of 0.4% in the last quarter of 2011 and 0.3% in the first three months of the year.  

The data confirms the UK is now stuck in the longest double dip recession since quarterly records were introduced in 1955. The last time the UK found itself in a double dip was in the 1970s when runaway oil prices and the miners’ strike weighed on the economy, although the dip only lasted two quarters.   

The news comes after the International Monetary Fund lowered its growth forecasts for the UK to 0.2% in 2012 and 1.4% in 2013, warning the UK faced ‘significant challenges’ from unemployment and the eurozone.

Currently around 8.1% of the population are out of work and with Spanish bond yields at crisis point the immediate future for the UK looks bleak.

The news also puts another big question mark over the Coalition’s cost cutting programme, which aims to slash £123 billion of debt, which stands at around the £1 trillion mark, or 66% of GDP.

Lee McDarby of Investec Corporate Treasury was stunned by the numbers.

'Truly shocking GDP figures in the UK have taken the wind out of sterling’s sails this morning. Investec’s economists forecast a weaker number than most of the market but nobody saw a number this bad coming,' McDarby said. 

'Poor weather and an extra bank holiday have been blamed on the quarterly contraction of 0.7%, but data like this suggests that the UK can’t hide behind Europe’s woes for much longer. After these poor GDP figures, if we see a recovery in the pound over the course of the day after the initial sell off then sterling really may be a bullet-proof currency.'

Meanwhile, Fidelity Worldwide Investment director of asset allocation, Trevor Greetham, said in these circumstances it is up to the government to boost its own spending plans.   

'The UK economy is suffering a double dip recession. Consumers are unwilling or unable to borrow and corporates refuse to invest. In these circumstance it is up to the government to boost its own spending plans,' Greetham said.

'Borrowing your way out of recession isn't as mad as it sounds. With ten year gilt yields at a record low 1.5%, the markets are sending a clear signal that there is substantially more headroom for counter-cyclical fiscal stimulus.

'If the economy responds, an increase in tax revenues should more than repay the additional cost and a rise in wages will help the consumer to grow into their debt. So far with austerity, the reverse is happening. We are saving our way into debt. Keynes would shudder.'

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