The Deep British Economic Slump

January 26, 2010

U.K. real GDP only edged 0.1% higher on a strict fourth quarter-over-third quarter basis not annualized, according to the advanced report on the national income accounts.  It was the first quarter of positive growth since the first quarter of 2008 but compared unfavorably to street expectations of a 0.4% increase.  The last eight quarters depict three stages of a monster British recession.  In the first half of 2008, real GDP growth slowed sharply to 1.2% at an annualized rate from expansion rates of 2.9% in 2006 and 2.6% in 2007.  The ensuing three quarters from mid-2008 through the first quarter of 2009 bore the brunt of the recession, with GDP collapsing 6.8% at an annualized rate.  Then, in the final three quarters of last year, Britain’s business cycle revealed itself to be L-shaped, as the economy settled into a pretty horizontal path with a 1.1% annualized pace of GDP decline.  Between 4Q07 and 4Q09, GDP had dropped 5.2%.  If the U.S. economy grew as fast last quarter as analysts suspect, the comparable net drop of GDP over the two years between 4Q07 and 4Q09 will be just 1.9%.

Service-producing sectors accounted for all of Britain’s meager economic growth last quarter.  The GDP contributions from agriculture, productive industries and construction each amounted to a big fat zero.  In 2009 as a whole, real GDP was 4.8% lower than its average level in 2008, and the portion of GDP attributable to both the construction and production sectors fell by somewhat over 10%, while services output dropped 3.7%.

The weaker-than-expected trend of GDP in the latter quarters of 2009 was at variance to significant improvement in the British purchasing manager readings.  The sum of the manufacturing and service PMIs averaged 80.5 in 1Q09, then 96.1 in 2Q09, 104.1 in 3Q09 and 110.0 last quarter.  The last three quarters were above the 92.6 average level for full-2008, and the figure for 4Q09 was almost as good as the full-2007 tally of 110.7.  Real GDP had expanded 2.6% during 2007.  Britain had plenty of macroeconomic policy support:  massive deficit spending, a 0.5% central bank rate since last March, massive amounts of quantitative monetary easing, and a depreciating currency during much of the recession.  The extreme severity of Britain’s recession and tepid start to its recovery underscore the economy’s over-dependency on financial services prior to the global financial crisis.

Copyright Larry Greenberg 2010.  All rights reserved.  No secondary distribution without express permission.



Comments are closed.