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Britain's sluggish growth may cause recession

Latest update : 2008-08-27

Second quarter figures point to economic stagnation in Britain, with most analysts thinking the country will surely face a recession. The government held the international economic situation responsible.

Britain faced the threat of a recession on Friday after official figures showed the economy stuttered to a halt in the second quarter with its weakest performance for 16 years.

The news is a major blow to British Prime Minister Gordon Brown whose governing Labour Party faces a hammering in the opinion polls and who had prided himself on his record of economic prudence when finance minister.

In reaction, the British pound dropped close to two-year lows against the dollar but stocks got a boost on the view the Bank of England is now more likely to cut interest rates in an effort to boost the slowing economy.

Prior to the three months to June, the British economy had enjoyed 63 consecutive quarters of expansion, much of which had been under Brown's tenure as chancellor of the exchequer between 1997 and 2007.

The 15-nation eurozone economy, of which Britain is not a member, also slumped towards recession in the second quarter as it shrunk for the first time in its short history, adding to the uncertain outlook.

Economists said the latest data left Britain teetering on the verge of a recession -- which is defined as two or more quarters of negative economic growth.

"The second estimate of second-quarter UK GDP clearly increases the -- already strong -- chances that the economy will fall into recession over the coming quarters," said Capital Economics analyst Jonathan Loynes.

"The economy now looks set to grow by just 1.2 percent or so this year, with a very strong chance of a technical recession in the second half ... and things will be considerably worse in 2009."

The reading of zero growth in gross domestic product (GDP) compared to the first three months of 2008 was revised sharply down from an initial reading of 0.2-percent expansion in the second quarter.

It also marked the weakest quarterly growth rate since the second quarter of 1992, the Office for National Statistics (ONS) said in a statement on Friday.

A Treasury spokesman blamed the outcome on the global credit crunch and high commodity prices, particularly the soaring cost of oil.

Britain has been hit by soaring inflation, runaway fuel costs and a slumping property market, with each problem compounding the others and making policy even more difficult to set.

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

"The government's priority is to guide Britain through these challenging times while also supporting those hit hardest as a result of these global factors."

The ONS said British GDP grew 1.4 percent during the second quarter when compared with the year-earlier period. That compared with the previous official estimate of 1.6 percent growth. The third and final growth estimate for the second quarter will be published in a month.

Market expectations had been for no change for both growth readings.

The sharp downgrade to the quarterly figure "follows downward revisions to the growth in output of the production, construction and services industries," the ONS said.

Economists speculated that following the data the Bank of England's monetary policy committee (MPC) could slash interest rates some time soon, after holding borrowing costs at 5.0 percent earlier this month.

"We continue to expect a technical recession in the second half of the year and the MPC to respond with the first in a series of rate cuts in November," said Lehman Brothers analyst Peter Newland.

"We judge that the risks of an earlier move have risen."

Analysts at British financial services group Ernst & Young agreed.

"With GDP flat in the second quarter and further signs of slowing activity, a contraction in the third quarter is now highly likely," they wrote in a note to clients.

"As a result, the risks to medium-term inflation are likely to subside, giving the Bank of England the scope to cut interest rates sooner than they may have thought possible."

In the first quarter of 2008, the British economy recorded quarterly expansion of 0.3 percent and an annual growth reading of 2.3 percent.

Date created : 2008-08-22