Last Friday, the U.K.’s Q4 2012 GDP report showed that the economy contracted by 0.3% when analysts had only anticipated a smaller contraction of 0.1%. On a year-to-year basis, growth is flat. This means that if it weren’t for the summer Olympics and the Queen’s Diamond Jubilee, the British economy would probably be in much deeper trouble.
But let’s not get ahead of ourselves yet. It is only the preliminary reading and it could still be up for revisions. Remember that the government releases three versions of the GDP report, namely the preliminary, second estimate, and final readings, which are released a month apart.
Because it is the first reading though, it tends to have the most impact. This explains why the pound fell to its 13 ½ month lows following the release of the data. And if we don’t see any upward revisions, it would confirm fears that the U.K. is headed for a triple-dip recession.
For the newbies out there, a recession simply means two consecutive quarters of negative economic growth. Yeah, it’s as bad as it sounds. But try to imagine how much worse a double-dip recession is. It basically means that the economy managed to get out of a recession only to fall back into one again!
The U.K. is in an even worse state though. Should growth not rebound this quarter, the country would fall into its third recession in four years and a TRIPLE-dip one!
I’m sure you’re wondering “What are the chances of the U.K. actually entering a triple-dip recession?” so let’s take a closer look at their economic figures.
Components of the latest GDP report revealed that production and manufacturing sectors were among the worst performing industries for the period as output plummeted by 1.8% in Q4 2012. The services sector, which accounts for nearly 80% of overall economic growth, posted absolutely no growth during the same quarter.
The only sector that showed growth in Q4 2012 was the construction industry, which printed a mere 0.3% uptick in output. Although this was an improvement from the 2.5% decline seen during the previous quarter, economic analysts noted that the 0.3% rebound was still considerably lower than expected.
Some market watchers believe that the unwinding of economic activity spurred by the London Olympics last year left the U.K. with very little sources of growth during the last stretch of 2012. Still, others are hopeful that the U.K. has a fighting chance of escaping the dreaded triple-dip recession.
For one thing, the gradual improvement in the euro zone’s fiscal situation is helping renew financial confidence in European markets and overall demand in the global economy. On top of that, stimulus measures that have been put in place by the BOE could also revive lending and spending in the U.K.
Another factor that could keep the U.K. economy afloat is the improvement in the jobs market. After all, the U.K. just reported its tenth consecutive monthly increase in hiring, bringing the unemployment rate down from 7.8% to 7.7% in December last year. If the U.K. can sustain jobs growth in the coming months, it could result in stronger domestic spending, which could stoke overall economic performance.
Do you think the U.K. has a shot at dodging a triple-dip recession? Let us know your thoughts by posting a comment below or by voting in our poll!