Whatever kick-start the British economy got out of hosting the Olympic Games last summer has faded and the country is now heading toward its third recession in four years.
Figures released Friday by the Office for National Statistics showed gross domestic product fell by 0.3 per cent in the fourth quarter of 2012 compared with the previous quarter.
That was a worse reading than most economists expected and it threw cold water on rumours circulating on Thursday that the economy had actually expanded in the quarter. For all of 2012, the ONS said, GDP was flat.
Friday’s report nullified the 0.9-per-cent expansion Britain enjoyed in the third quarter, which was helped largely by the Summer Olympics. In one indication of how quickly the economy turned, the ONS said sports activities, amusement and recreation plunged by 22.5 per cent in the fourth quarter.
The dire figures have increased pressure on the government of Prime Minister David Cameron, who came to power in 2010 promising to revive the country’s economy and finances. He has embarked on a strict austerity program that has shown few results so far and there are growing calls for the government to ease back, including from the International Monetary Fund.
For now, at least, the government has indicated it plans to stick by its program.
“We have a reminder today that Britain faces a very difficult economic situation,” George Osborne, the Chancellor of the Exchequer (finance minister) said Friday in Davos, Switzerland. “A reminder that last year was particularly difficult, that we face problems at home because of the debts built up over many years and problems abroad with the euro zone, where we export most of our products, in recession.”
By almost any measure, Britain’s economy faces some big challenges. There has been only one quarter of economic growth in the past five and the economy is now 3.3-per-cent smaller than at the start of the financial crisis in 2008.
If the economy were to shrink again in the first quarter of 2013, it will mark two consecutive quarters of contraction which economists define as a recession. And it would be the third recession since 2008. The prospects of that happening look almost certain. with bad weather throughout most of January grinding the country to a halt at times and hurting many businesses.
“There are no positive takeaways from today’s [report],” said Lee Hopley, chief economist for a national manufacturers’ organization called EEF. “Even assuming some unwinding of activity from the Olympics boost in the previous quarter, this still leaves no real signs of underlying growth in the economy.”
There are a few glimmers of hope. Employment levels have remained surprisingly decent and even increased in the three-month period ending in November. During that stretch the unemployment rate fell to 7.7 per cent from 7.8 per cent.
And much of the GDP contraction in the fourth quarter was due to extended maintenance at the Buzzard oil field in the North Sea, which has now restarted production. If that was excluded, the economy still would have shrunk between the third and fourth quarters, but by 0.1 per cent instead of 0.3 per cent.
But all that has been offset by some grim recent news. The ONS reported this week that wages have been growing well below the 2.7-per-cent inflation rate, signalling that while people are working they won’t have much extra money to spend. And a host of jobs cuts have also been announced this month, 1,200 at airline Flybe and 1,300 at Lloyds Bank.
“With the economy suffering a renewed GDP dip in the fourth quarter of 2012, the definition of the current state of the U.K. economy as DIRE needs to be amended from Disappointing Inflation Rotten Expansion to Disappointing Inflation Reduced Economy,” said Howard Archer, an economist at IHS Global Insight in London.