UK economic data show worst contraction on record

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In the just finished second quarter of 2009, the UK economy was contracting a massive 5.6% from the year ago period.  This is the worst performance since records began in 1955. What’s more, the data surprised to the downside, with the quarter-on-quarter contraction coming in at 0.8%, much worse than the 0.3% contraction which had been expected.  Yet, somehow markets are shrugging this data off and the FTSE is up for the day.

The Telegraph has some wonderful graphs in a slideshow attached to their article on the story.  See their story here.  It shows that the depths of recession in the UK are behind us at this point, as the economy shrank at a much faster 2.4% in Q1.  Nevertheless, the data in the graphs should leave no doubt that the UK is still in recession despite some speculation that it had left recession late last quarter.

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The Guardian reported the data this way:

Britain’s economy contracted by a record 5.6% over the past year as output fell for a fifth straight quarter, the government revealed today.

Dashing hopes that the steepest decline in growth since the 1930s might be nearing an end, the Office for National Statistics said gross domestic product fell by 0.8% in the three months to June.

The size of the drop surprised the City, which had expected only a 0.3% decline following recent signs of a pickup in the housing market and strong growth in high street spending.

Sterling dropped sharply after the data, losing a cent against both the dollar and euro to $1.6450 and €1.1577. Mark O’Sullivan, director of dealing at Currencies Direct, said the poor figures had sparked a sell-off of sterling and it is likely to remain under pressure: "The political uncertainty in the UK until the next general election remains a real worry for investors. Many will stay away, particularly with the Conservatives keeping their policies so close to their chest. This could mean further bad news for sterling."

Shares, enjoying their tenth successive day of gains, appeared to shrug off the news, however. The FTSE 100 was up almost 30 points at 11am, at 4589.28.

Describing the figures as "shockingly bad" Vicky Redwood, UK Economist at Capital Economics, said they "firmly dash any hopes that the UK had already pulled out of recession." Getting the economy back on track "looks likely to be a long hard slog," she said.

Ahead of today’s data, some economists had even predicted that the UK could post its first positive growth since early 2008, and the size of the decline prompted immediate speculation that the Bank of England would be forced into fresh emergency action to kick-start activity.

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You can bet the Bank of England will continue to be very accommodative for the foreseeable future. former MPC member David Blanchflower told Bloomberg that would be his recommendation going forward.

Former policy maker David Blanchflower said in an interview on Bloomberg Television yesterday that the economy may not be through the worst, and the central bank risks stifling the recovery were it to raise rates or reverse the bond-purchase program prematurely.

“My worry is that the tightening comes too soon and people kill off any recovery that’s coming,” he said. “It’s very early days to say that you know the endgame is even in sight.”

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