Economy on brink of recession despite Q3 growth
LONDON (Reuters)- - Britain's economy is teetering on the brink of recession despite a solid performance in the third quarter, increasing pressure on the government to boost growth as renewed turmoil in the euro zone threatens to hit the country hard.
The Bank of England has already started pumping fresh money into the economy to prevent a sharp contraction, but the government is struggling to find ways to support the recovery -- already the slowest since the 1930s Great Depression -- without compromising its goal to erase a record budget deficit.
Gross domestic product grew by 0.5 percent on the quarter as business services and finance posted the strongest quarterly increase in four years, the Office for National Statistics said on Tuesday, a notch more than analysts had forecast.
However, the Purchasing Managers' Index (PMI) survey released earlier showed manufacturing activity in October fell at its sharpest monthly rate since June 2009 when Britain was still in recession.
Chancellor George Osborne acknowledged that the country faced a rough ride, though he reiterated his commitment to erase a record budget deficit of nearly 10 percent of GDP.
"It is a journey made more difficult by the kinds of things you see for example today in the markets because of the situation in the euro zone. But we are determined to finish this journey," he said.
Calls for action have been increasing over the past couple of months as unemployment has hit a 17-year high and many Britons are worried about their jobs and finances as soaring prices and slow wage increases squeeze their living standards.
"These are really worrying times for families and pensioners struggling to pay the bills, young people out of work in record numbers and businesses on the edge," said Ed Balls, Osborne's counterpart in the opposition Labour party, as he urged the government to loosen its austerity plans.
Economists said most of the third quarter growth was a mere rebound from weak growth of 0.1 percent in the second quarter when an extra holiday for the royal wedding and supply-chain disruptions caused by the tsunami in Japan shaved off as much as 0.5 percentage points from quarterly growth.
"The third quarter is already history," said Chris Williamson of PMI survey-compiler Markit, which showed a slump in the manufacturing PMI index to 47.4 in October from 50.8.
The survey also showed that manufacturers shed jobs as orders slumped, highlighting that industry -- long a bright spot of Britain's sluggish recovery -- shifted into reverse gear before the latest escalation of the euro crisis.
"Against a background of high inflation, the ongoing fiscal squeeze and the euro-zone crisis, we continue to expect the economy to stagnate over 2012 as a whole, with a growing risk of a deep recession if the euro-zone situation escalates dramatically," said Capital Economics analyst Jonathan Loynes.
The growth outlook for Europe -- Britain's biggest trading partner -- has already weakened sharply over the last month, and the announcement by Greece to hold a referendum over last week's euro zone rescue deal has introduced fresh uncertainty.
The ONS said Britain's annual growth rate eased to 0.5 percent in the three months through September, from 0.6 percent in the second quarter.
Business services and financial sectors were the biggest contributor to overall growth in the third quarter, growing by 0.8 percent.
Overall services output grew by 0.7 percent. Industry output rose by 0.5 percent, with manufacturing posting only 0.2 percent growth. Construction output was down 0.6 percent on the quarter.
The Bank launched a fresh round of quantitative easing in early October, pumping another 75 billion pounds of cash into the economy, as policymakers warned that the euro crisis threatens to push Britain into recession.
Business secretary Vince Cable told Reuters in an interview on Monday that the country can still avoid recession.
But a string of surveys have painted a bleak picture, with the PMI's fall hinting that the manufacturing sector made an extremely weak start to the fourth quarter.
Consumer confidence has slumped to levels that previously heralded the start of a recession and the CBI industry lobby's survey showed that manufacturers suffered the biggest drop in orders in a year and expected to cut production.
The ONS said it had no evidence that the riots in major British cities in August had a significant impact on GDP. The office did not provide an estimate of how much Q3 GDP had been boosted by a rebound from the special factors that hit growth in the second quarter.
(Additional reporting by Peter Griffiths, Fiona Shaikh and Jonathan Cable; editing by Anna Willard)
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