Instant View: UK Q4 GDP falls more than expected

Published January 25, 2013

| Reuters

Britain's economy shrank more than expected in the last three months of 2012, moving closer to a third recession in four years, hit by lower output from the North Sea and manufacturers.

ECONOMISTS' REACTION

LEE HOPLEY, CHIEF ECONOMIST AT MANUFACTURERS ORGANISATION EEF

"There are no positive takeaways from today's first estimate of GDP in the final months of last year. Even assuming some unwinding of activity from the Olympics boost in the previous quarter, this still leaves no real signs of underlying growth in the economy. The news from industry was particularly weak, with November's sharp drop on output contributing to a rather grim fourth quarter and leaving the overall picture for manufacturing in 2012 the weakest since 2009.

"Still there are some factors which might indicate that 2013 will not be as bad as 2012 - the big euro-exit risk has diminished, the employment picture is better than expected and manufacturers are continuing to look to new markets for growth.

"That said, government must hit the accelerator on getting capital projects moving and be clearer about its economic priorities to give businesses more confidence to invest for the future."

CHRIS WILLIAMSON, MARKIT

"Today's numbers have greatly increased the risk of a new recession and a downgrading of the UK's AAA credit rating. (They) pile ever more pressure on the Chancellor to seek ways to revive the economy in the March Budget."

"Looking ahead, there is great uncertainty about the first quarter, as different parts of the economy are moving in different directions. While the more domestically-focused service sector is weakening, contracting at the fastest rate for two years in December according to the PMI, the manufacturing sector appears to be gaining growth momentum, buoyed by rising demand from the US, Germany and emerging markets in particular.

"The question is whether the smaller manufacturing sector can help drive a return to growth in the wider economy, or whether weak domestic consumer and business confidence will mean a downturn in services and retail offset any expansion of the goods-producing sector.

HOWARD ARCHER, IHS GLOBAL INSIGHT

"It must be noted that the sharper-than-expected drop in GDP in the fourth quarter was influenced significantly by a record drop in mining and quarrying output which was due to repair work on a major North Sea oilfield (this contributed 0.2 percentage point to the GDP contraction).

"There was also undoubtedly some payback in the fourth quarter from the Olympics-lifted GDP spike of 0.9 percent quarter-on-quarter in the third quarter.

"We believe the economy is essentially flat-lining. Significantly, GDP was flat year-on-year in the fourth quarter of 2012. GDP was also flat over 2012 as a whole as a number of distortions lead to fluctuating quarter-on-quarter GDP through the year (notably the Queen's Golden Jubilee and the Olympics).

"We had expected the economy to eke out modest growth in the first quarter of 2013 thereby avoiding renewed recession, but this is looking increasingly questionable given the disruption to economic activity that has come from the snow. It is worrying to note that GDP contraction was suffered in both the first quarter of 2012 and the fourth quarter of 2010 when there was significant snow disruption. With the economy fragile, it currently takes very little for modest contraction to occur instead of modest growth."

FORMER BANK OF ENGLAND POLICYMAKER ANDREW SENTANCE

"It's important we don't over-egg these figures," Sentance told Sky TV. "We had some data earlier this week that showed employment is growing, and possibly when the ONS catch up with what these people are doing, setting up new businesses and so on, that might cause an upward revision in the figures.

"George Osborne needs to hold his nerve on government spending but I think he can do more to create a better climate of confidence for business by showing that the government is on businesses' side - by helping them win new export markets, by reducing the burden of regulation, streamlining the tax system and reforming the planning system so that businesses can expand more easily."

JAMES KNIGHTLEY, ING

"We are going to see all sorts of headlines about triple dip and the UK possibly returning to recession.

"The problem with that is that the quality of this report is so poor. The most accurate thing we can say is that taking this and other reports together, the data is consistent with ongoing stagnation in the UK economy - the year on year GDP growth rate remains at 0.0 percent, the same as in Q3 2012.

"That said, we are hopeful of a gradual improvement through 2013. Global optimism is improving with the euro zone situation looking less calamitous and while there are concerns about the U.S., a longer term deal on the debt ceiling looks as though it can be done.

"Furthermore, the general data flow outside of the UK has been looking a little more encouraging and this should help support risk sentiment. Sterling has been softening, which is helping UK competitiveness, while the Bank of England's Funding for Lending Scheme is also helping to improve credit conditions. UK employment is also looking good right now and so if these trends can all remain in place there is the platform for the UK economy to start performing more strongly as we progress through the year."

ROB WOOD, BERENBERG BANK

"Double-dip, triple dip, whatever multiple of dips we're talking about right now meters the point I think. The UK is bouncing around, the flatlining trend is moving sideways, whatever way you want to describe it.

"That's likely to remain a theme for the next couple of quarters, two consecutive quarters of return to contraction driven by an echo of the Olympics, in this case, or snow perhaps in Q1, isn't going to change the underlying picture, just as one quarter of expansion in Q3 didn't.

"The UK's suffering from a fiscal consolidation, inflation outstripping wage growth and weak exports. Of those at least fiscal consolidation and inflation outstripping wage growth is likely to continue.

"Stagnation is going to be theme for the next couple of quarters or so. This obviously brings Osborne's strategy into sharp relief and also the MPC strategy of maintaining or not sanctioning further monetary policy action. The Bank of England were forecasting a return to some growth in Q1 and that is likely to be disappointed."

DAVID TINSLEY BNP PARIBAS

"I wouldn't exaggerate the weakness, we were likely to see a contraction and the MPC has highlighted that. But it's clearly a bit larger than the consensus and ourselves were expecting.

"I would hope that we will get a bounce in the first quarter, but of course the snow does pose a risk to that. So, there is a risk of a triple dip (recession) in the UK, even if it is for somewhat erratic reasons.

"The economy ... should gain better traction from here. I'm not sure this is sufficiently weak to justify the Bank (of England) doing more QE."

PHILIP SHAW, INVESTEC

"This is a very disappointing outturn. Markets realize that figures can be revised, the construction figures look a little bit flaky, but clearly now the talk will focus on whether we are in a triple dip recession. Certainly the news is unwanted."

ROSS WALKER, RBS

"Moderately disappointing. We had (forecast) minus 0.1 with downside risks and the surprise is, that the rise in construction, which two months worth of official data had signaled, has disappeared.

The IP and services component were broadly in line with expectations. We've obviously had a big revision to those previously published construction figures. It doesn't really alter the big picture, output's still broadly flat."

ALAN CLARKE, SCOTIABANK

"It's disappointing, and particularly given that actually monthly services were quite resilient in November. So something has gone bad in the case of construction, or less well than we'd hoped for.

"If we add back on the disruption from North Sea oil it's not as bad as the headline looks but clearly it's disappointing."

URL

http://www.foxbusiness.com/news/2013/01/25/instant-view-uk-q4-gdp-falls-more-than-expected/