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The Globe and Mail

U.K. mired in recession, central bank poised to act

A man walks past the Bank of England, in the City of London June 15, 2012.


Britain's economy fell back into recession faster than first thought and seems unlikely to recover for some time, data showed on Thursday, echoing grim predictions from a central bank now all but certain to revive its stimulus program next week.

The economy shrank by 0.3 per cent between January and March, the Office for National Statistics said. That confirmed an earlier estimate, but revised figures for the last quarter of 2011 showed a slump of 0.4 per cent, steeper than initially reported.

A spread of downbeat data highlighted broad weakness in Britain's economy, which has struggled to gain traction since the 2007/08 financial crisis as government spending cuts bite and the debt turmoil in the euro zone crushes confidence.

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Bank of England Governor Mervyn King said on Tuesday that the outlook had worsened significantly in recent weeks and Britain risked falling into a downward spiral as businesses put off investment due to uncertain global prospects.

Thursday's data bolstered an already strong case for the Bank to restart its quantitative easing bond-buying program, a day after a Reuters poll of economists give a median 75 per cent chance that the bank will flood the market with another 50-billion pounds of cash at its July 4/5 meeting.

"You have a lot of volatility entering the UK economic data over the next couple of quarters, including the negative impact from the Diamond Jubilee bank holiday," said Philip Shaw, economist at Investec.

"Our best guess is that the economy is broadly flat-lining and to our minds it justifies further monetary stimulus."

The decline in U.K. economic output in the first three months of this year would have been much greater were it not for the biggest jump in government spending in almost seven years and a small rise in service sector output.

Construction output was revised lower to show its biggest decline in three years, while industrial output was also revised down to show a 0.5-per-cent decline on the quarter.

Output in the second quarter is likely to be even weaker, with an extra public holiday placing an additional drag on the economy.

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Britain's Conservative-led coalition government had been counting on a private sector-led recovery to drive growth while it presses ahead with austerity measures aimed at eliminating a budget deficit that is still around 8 per cent of GDP.

But those hopes have been quashed by the worsening crisis in the euro zone – Britain's biggest trading partner – and signs of a slowdown in the United States and emerging economies.

Thursday's data showed exports fell at their fastest pace in almost a year, with net trade shaving 0.4 percentage points off output in the first three months of 2012.

Household spending has also been squeezed by high inflation and muted wage growth, a trend confirmed by Thursday's figures which showed households' disposable income fell by 0.9 per cent. That left Britons with less spare cash to set aside, driving the household saving ratio to its lowest in a year at 6.4 per cent.

"We think that the recession has probably continued into the second quarter," said Vicky Redwood at Capital Economics. "There are still numerous factors likely to constrain the recovery going forward, not least tight credit conditions."

Banks have become increasingly reluctant to lend to businesses and households as they attempt to clean up their balance sheets and due to the high cost of raising capital.

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Separately, Bank figures on Thursday showed British banks expect to significantly raise borrowing costs for customers over the next three months, as the cost of their own funding rises.

Britain's current account deficit also made gloomy reading, widening more than expected to £11.179-billion from a shortfall of £7.228-billion, equivalent to 2.9 per cent of GDP.

Economists had expected the current account gap to widen to £9.0-billion.

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