August 22, 2008 / 8:40 AM / 11 years ago

Economy at its weakest since 1992

LONDON (Reuters) - The economy failed to expand in the second quarter of this year for the first time since the slump of the early 1990s and reinforcing expectations interest rates will have to fall to avoid a painful recession.

A woman passes a shop with a 'Closing Down Sale' sign in the window during the summer sales in London July 24, 2008. REUTERS/Luke MacGregor

The Office for National Statistics revised down its GDP reading to show it was unchanged on the quarter in the three months to June from an initial estimate of 0.2 percent growth and down from 0.3 percent growth in the first quarter.

That larger than expected revision was the lowest reading since the second quarter of 1992 when the economy was in the throes of its last recession. On the year, GDP was just 1.4 percent higher, the weakest since the final quarter of 1992.

Sterling and the FTSE 100 index fell and interest rate futures rose after the data boosted expectations that borrowing costs will need to fall to prevent a deep and protracted slowdown as the credit crunch bites.

“This really does put a rate cut firmly on the agenda although it is unlikely to come until we have seen the peak in inflation,” said Brian Hillard, an economist at Societe Generale.

The Bank of England is already factoring in the economy standing still over the next year and has said growth needs to slow to tame inflation, which is running at more than double the central bank’s 2 percent target and expected to spike higher.

The figures are likely to fan further criticism of Prime Minister Gordon Brown’s handling of the economy. He will no longer be able to boast of the economy growing continuously since the Labour government came to power in 1997.

But the government has argued all the major industrialised nations are suffering. The euro zone economy contracted in the second quarter.

“The UK, like other economies, is seeing the consequences of globally high commodity prices, as well as the uncertainty in the credit markets,” a Treasury spokesman said.

BROAD WEAKNESS

The downward revisions to the preliminary estimate of GDP were across the board. The dominant services sector grew by just 0.2 percent on the quarter, its poorest showing since the fourth quarter of 1995.

Manufacturing output fell by 0.8 percent on the quarter, the weakest since the first quarter of 2005. Construction output, which has been hard hit by the housing market slump, fell by 1.1 percent on the quarter — the worst since Q3 2005.

Construction firms have slashed thousands of jobs to cope and housebuilder Persimmon reported a sharp fall in profits this week, saying it hoped to see government help in the mortgage market soon.

Household spending fell 0.1 percent on the quarter, its weakest since the second quarter of 2005, reflecting crumbling consumer confidence and higher living costs.

The bellwether John Lewis chain reported another annual fall in weekly sales at its department stores on Friday, the 10th week out of the last 15 to show a decline.

However, policymakers have said they expect a weaker pound to boost exports, helping to rebalance — and bolster — the economy. Net trade contributed 0.3 percentage points to the Q2 reading and government spending also lent some support.

“We expect net trade to continue to make a positive contribution to growth, reflecting the decline in the exchange rate,” said Peter Newland, an economist at Lehman Brothers.

“But given the weakening of demand in the UK’s main export markets (particularly the euro area) this is unlikely to be sufficient to stop GDP growth turning negative.”

Shoppers sit outside a retail store in Oxford Street in central London June 19, 2008. REUTERS/Toby Melville

Inventories surged higher but statisticians said this was down to a statistical adjustment, rather than a surge in stock building which could then become a further drag on the economy.

“We continue to expect a technical recession in the second half of the year and the Monetary Policy Committee to respond with the first in a series of rate cuts in November,” Newland said. “We judge that the risks of an earlier move have risen.”

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