April 25th, 2012
05:46 PM GMT
London (CNN) – As spring-time rain flooded London's streets and uncomfortable soundbites emerged from the Leveson inquiry, the UK government faced further misery: The UK is back in recession.
The revelation - a psychological blow, even if the figures are later revised up - will increase pressure on David Cameron’s government, already under pressure from the probe into its relationship with Rupert Murdoch’s media empire.
The “double-dip" recession is a loose phrase, but this slump is close enough to the 2008/2009 contraction to warrant the dreaded term. The last time the UK was in a double-dip recession was in the 1970s.
The UK, like its European peers, is following a path of austerity as it seeks to return to economic health.
Finance minister George Osborne said the news was “very disappointing,” but that the government wanted to ensure “we don’t deliberately add to borrowing, don’t deliberately spend more and make a difficult situation even worse.”
So, the policy of tightening the purse strings continues. But the "r" word ensures the question of how best to promote growth is put firmly back on the table.
In the UK, focus is on the Bank of England’s Monetary Policy Committee (MPC) and whether it will return to stimulus measures. An immediate move seems unlikely, with the bank’s April minutes noting the falls in construction output were “perplexing” and the committee was “minded not to place much weight on them.” Further, it noted “the recovery in activity in the global economy looked to be proceeding broadly as expected.”
Analysts also questioned Wednesday’s figures, telling CNN they expect the routinely revised figures would show the economy flat-lining rather than going backwards.
Howard Archer, UK economist at IHS Global Insight, said the recorded 3% drop in construction output which sliced 0.2% off the GDP data was “highly questionable,” and at odds with statistical evidence elsewhere.
But the UK economy is fragile, and Wednesday’s data will put the spotlight on the MPC’s next meeting, in a fortnight. Poor economic between now and then could shift thinking toward stimulus, according to Deutsche Bank’s George Buckley. “If [such figures] end up echoing the recent moves in this week’s euro survey then we cannot rule out the risk of another round of asset purchases,” he wrote in a note.
Thus the austerity versus stimulus debate continues. In mainland Europe, austerity is delivering little success. Greece, which has obediently made cuts in return for aid, this week said economic contraction would be 5% for the year.
That, of course, creates a credit market boost for the UK: Its economy is seen as safe haven, ensuring its bond yields, or borrowing costs, remain low.
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