Thursday, May 24, 2012

Recession In Britain

The UK economy shrank by 0.3% in the first three months of the year, revised figures have shown last month's initial estimate from the Office for National Statistics (ONS) which showed a contraction of 0.2% were to optimistic. The downward revision was due to a bigger contraction in construction output than previously estimated. In the final three months of last year, the economy also shrank by 0.3%, meaning it is official, the UK is back in recession. 

Many economist  expect the UK economy to shrink again in the second quarter of the year and that the Queen's Diamond Jubilee could reduce output. The shadow chancellor Ed Balls described Prime Minister David Cameron and Chancellor George Osborne as "complacent and out of touch".It's now clear that this is a recession made in Downing Street by this government's failed policies," he said. "Despite all the problems in the euro area, France, Germany and the Eurozone as a whole have so far avoided recession and only exports to other countries stopped us going into recession a year ago. The result is that Britain is now in a weaker position if things get worse in the Eurozone in the coming months."

The British government recently increased spending by 1.6%, this was the biggest rise since the first quarter of 2008, this increase helped offset some of the factors slowing the economy. The increase  was mainly in the areas of  healthcare and defense. The figures also showed unchanged growth in the service sector of 0.1%, where household spending increased by the same amount. Compared with the previous year as opposed to the previous quarter, growth fell by 0.1%, the first annual drop since the final three months of 2009.

When the first estimate of the GDP figures was released last month, a number of commentators expressed surprise at the data. Almost everyone agrees that the economy is not recovering properly and with the uncertainty over Europe hanging over the outlook many feel that the Monetary Policy Committee of the Bank of England will sanction further quantitative easing (QE) at some point later on this year. The Bank has already pumped £325bn into the UK economy through its QE program to try to boost growth and has indicated it is open to the idea of further cash injections.

Earlier this week, the head of the International Monetary Fund, Christine Lagarde, said that if the economic recovery continues to falter, the UK should consider more QE. She also suggested the Bank could cut interest rates below the current record low of 0.5%. Lagarde did, however, back the government's austerity drive designed to cut the UK's budget deficit. Recently the word "austerity" is often used with negitive connotations, but it is really a substitute for "live within your means". In recent weeks, there have been growing calls across Europe for a greater focus on growth, as opposed to austerity. I as well as many economist think Britain is on the right track, even if the path is not easy. You cannot borrow and spend your way to prosperity.

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