U.K.’s Double-Dip Dilemma

All those whiz kids over at Wall Street were expecting growth of 0.5% from the U.K. last quarter. Sadly, they were off by a nasty negative sign, as yesterday’s report showed a 0.5% contraction in the economy. Blimey!

So what exactly caused the contraction?

According to the report, we can blame poor weather for the dismal performance of the U.K. economy. The two industries that were hit the hardest were services and construction. During the last quarter, service companies’ output fell by 0.5%, while construction dropped by a whopping 3.3%!

Remember, service industries encompass a big chunk of any economy. But if nobody wants to leave their homes, then service-based companies will surely take a hit because, well… there’s nobody to serve! As for construction, lemme ask you a question: would you wanna go out and build in freezing cold weather? Didn’t think so.

So, despite the early signs that the economy wouldn’t do too well (did everybody just forget last week’s retail sales figures?), the pound was sold off like a Justin Bieber concert ticket. How bad was the damage? GBP/USD dropped a solid 200 pips following the release of the report!

The violent way in which traders ditched the pound on Tuesday could be attributed to fears of a double-dip recession. You see, my amigos, economists want to avoid a double-dip recession in the same way you want to avoid sharing nacho cheese dip with people who double dip. (Pipcrawler, this means you!)

Ahh yes, “recession”…

A word that makes even the most macho economists tremble. But when exactly is an economy in recession? In not so many words, it can be said that an economy is in recession when it’s in a decline. What we usually see is a drop in GDP for two or more consecutive quarters, together with a decline in employment and other aspects of the economy.

A double-dip recession, on the other hand, is exactly what it sounds like. It’s when the economy slides back into recession after a brief period of positive growth. Sometimes, the second dip into recession can be just as bad as the first, and twice as frustrating.

If you recall, the U.K. was actually one of the last of the major economies to emerge from recession. It has only been a year since it was officially diagnosed as “recession-free,” but now it’s beginning to look as though old symptoms have returned.

It doesn’t help that the U.K. is also currently struggling with stagflation. As I explained in a past article about U.K.’s list of problems, stagflation is the nasty combination of high inflation and stagnant economic growth. This phenomenon is usually accompanied by high unemployment, which is evidenced by that climb from 7.7% to 7.9% in U.K.’s jobless rate. Ouch!

But wait, there’s more! Bear in mind that the U.K. still has a ton of spending cuts to deal with. If the British economy is already contracting without the impact of austerity measures, how much worse will it fare when the belt-tightening policies kick in?

Still, some economic gurus are hopeful that the U.K. can post positive growth in the coming quarters. In fact, the National Institute of Economic and Social Research (NIESR) predicted that the U.K. will grow by 1.7% this year and expand by 2.2% in 2012. But before the Brits can party like it’s 2012, NIESR also pointed out that there’s a chance that the economy could contract and possibly enter another recession when fiscal tightening takes place.

It ain’t the end of the world for the U.K. though. Of course BOE policymakers are probably feeling the pressure to step up their game and come up with a cure for all of U.K.’s weaknesses. Let’s wait and see what they can pull out of their sleeves…

Until then, add us on Facebook or follow us on Twitter if you still haven’t so you can stay updated with our analysis on the U.K.’s economic standing.