Britain's Economy Seen Stuck in Recession in Second Quarter

By REUTERS

Published: July 24, 2012 at 7:07 PM ET

LONDON (Reuters) - Britain is braced for gloomy figures on Wednesday that look set to show the country still mired in recession ahead of the London Olympics, as the euro zone debt crisis, public spending cuts and an extra holiday weighed on the economy in the second quarter.

Britain tipped into a second recession within four years at the end of last year, and preliminary second-quarter data due at 0830 GMT is forecast to show a 0.2 percent contraction, on top of the 0.3 percent decline at the start of the year.

Such dire news will keep the heat on finance minister George Osborne, under pressure to get the economy growing again after a crisis that has left many Britons poorer as rising prices and higher taxes ate up meager wage increases.

The Bank of England has already announced another 50 billion pound program of gilt purchases with newly created money to soften a grim economic outlook.

And the government has taken a number of steps to get credit flowing to businesses and support infrastructure spending.

But should the official figures show an even sharper decline than expected, market speculation will increase that the central bank may go beyond its comfort zone and cut interest rates below their record-low 0.5 percent, as well as deepen opposition to the government's austerity program.

"In underlying terms, things continue to look very weak," said Allan Monks, an economist at J.P. Morgan.

Purchasing managers' surveys for the service, manufacturing and construction sectors in recent months point to a 0.1 percent contraction for the quarter, and the official industrial output and construction data for April and May suggest worse.

In addition, the wettest spring in a century kept Britons from shopping for seasonal products and summer clothes, hurting retailers' business.

On top of this, output across the board was depressed in June by an extra public holiday to mark Queen Elizabeth's Diamond Jubilee -- something Monks estimates will reduce second-quarter GDP by around 0.4 percent.

Most economists expect a return to growth in the third quarter, as the London Olympics offer a one-off boost through ticket sales and visitors spending.

And some, such as Societe Generale's Brian Hilliard, argue that increasing employment levels suggest the economy is healthier than the headline GDP figures suggest.

But the overall outlook is poor. Last week the International Monetary Fund slashed its growth forecast for Britain by more than those for any other advanced economy, and warned the government and BoE that they will need to rethink their approach if the economy fails to pick up by early next year.

Eliminating Britain's structural budget deficit over the next five years is the central political goal of Britain's coalition of Conservatives and Liberal Democrats, but the opposition Labour Party says the pace is too rapid.

Over the past month the coalition and BoE have announced several measures to ease the flow of credit to households and businesses, as the euro zone debt crisis saps demand in Britain's major export markets.

But for now, any change to the fiscal austerity program is opposed both by finance minister George Osborne and BoE Governor Mervyn King, who fear it could trigger a loss of confidence in Britain's commitment to long-term deficit reduction.

(editing by Ron Askew)

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