The U.K. is set to print its Q1 2013 GDP figure this Thursday and, while most analysts are expecting 0.1% growth, the chance of a downside surprise is very high.
Remember that the British economic entered a five-quarter long recession starting from Q2 2008 then double-dipped from late 2011 to early 2012 on the onset of the euro zone debt fiasco. After getting back on its feet for a few months, the U.K. printed yet another negative GDP figure for Q1 2012 when austerity measures weighed on overall growth.
This means that a negative GDP reading for the first quarter of this year would put the country back in a technical recession for the third time in half a decade. What are the signs pointing to this scenario?
1. Growth Frozen by Cold Weather
At the start of the year, the U.K. was already facing significant headwinds from the cold snap in January that led to disruptions in transport services, store operations, and construction work. It didn’t help that the heavy snowfall resumed in March and may have been one of the main factors that caused a 0.7% drop in spending for the period.
Because of that, several economists believe that the slight rebound in spending and manufacturing seen last February will not be enough to offset two months’ worth of bleak economic activity. UBS economist Amit Kara noted that there is a large downside risk to the expected 0.1% growth as the unusually cold weather could make the triple-dip a reality.
2. Surprise Downgrades from Financial Institutions
Last week, the International Monetary Fund (IMF) announced that it had decided to slash its 2013 growth projection for U.K. by 0.3%. It said that the government’s austerity measures are taking a major toll on consumer demand, and it should consider cutting back. It urged the U.K. government to explore other avenues to reduce the budget deficit as the current program in place is having a big negative effect on growth.
A few days later, credit rating agency Fitch also lowered U.K.’s sovereign debt to AA+ from AAA. The agency cited that weak growth is impacting the country’s debt and deficit levels.
Moreover, Fitch also decreased its 2013 growth forecast to just 0.8%. After Moody’s, Fitch is the second agency to remove U.K. of its prized AAA rating. Rumor has it that Standard & Poor would soon follow, especially since the firm has already stated that it has a negative outlook on U.K. Trust these well-known financial institutions to know if further weakness is in the cards!
3. Disappointing Economic Figures
Many aspects of U.K.’s economy are suffering. For instance, the most recent retail sales report showed a bleak 0.7% decline. This is a big deal as consumer activity makes up a huge chunk of the country’s GDP. Hiring has also been tapering down, and this probably put a drag on household spending as well.
In addition, the manufacturing PMI, a key leading indicator, only printed a reading of 48.3. It was below 50.0, the number that divides contraction from growth. The construction PMI also reflected U.K.’s weak economy as it was only at 47.2. It doesn’t help that external demand is down due to the recession in other parts of Europe.
Given these signs, do you think that the U.K. will post negative growth for the first quarter? Let us know by voting through the poll below!