Triple dip on the cards as fourth quarter GDP falls 0.3 per cent.

25th January 2013

The UK economy has effectively flatlined for a year as a triple dip recession looks increasingly likely with GDP contracting by 0.3 per cent in the last quarter.

The figure is worse than City expectations which had been for a contraction around 0.1 per cent. Some of the fall is blamed on an Olympic economic hangover.

Azad Zangana, European Economist at Schroders says: "The construction sector made the biggest positive contribution by growing 0.3 per cent. However, this was not enough to offset the fall in industrial production of 1.8 per cent. Meanwhile, service sector activity was flat on the quarter.

"Part of the negative hit to growth was caused by an Olympics hangover, where the boost seen in the third quarter disappeared. This should be seen as a one-off hit to the economy. However, now that a negative GDP figure has been recorded, there is a significant risk that the UK economy suffers a triple-dip recession. Weak underlying economic activity coupled with the disruption of recent poor weather could cause GDP to fall in the first quarter of 2013.”

Zangana also points to bad news from the Eurozone. He says: "The external environment is not helping either. The latest leading indicators from France suggest the recession there is set to deepen, while similar data from Spain and Italy also suggest more downside risks.”

In terms of monetary policy, he says: “The Bank of England seems to be waiting for more evidence on the effectiveness of the Funding for Lending Scheme. The scheme has helped lower the cost of borrowing for both corporates and households, and has increased the number of higher loan-to-value products on offer. However, demand for borrowing from credit worthy individuals and firms remains low. We expect the Bank of England to restart its quantitative easing programme in the Spring as the economy continues to disappoint.”

Zangana expects the UK to lose its AAA rating in the near future.

 

 

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