U.K. Economy Contracts More Than Forecast For Q4

U.K. Economy Contracts More Than Forecast For Q4

The British economy contracted in the fourth quarter, more than anticipated, raising worries the economy is coming back to recession.

U.K. GDP for the last three months of 2012 (advanced reading) showed drop of 0.3%, compared with forecasts of 0.1% contraction, after it recorded an expansion of 0.9%, the strongest growth in five years, leaving three consecutive quarters of contraction after experiencing a double-dip recession.

On the yearly basis, the economy’s growth remained flat reading, missing expectations of having 0.2% expansion.

It seems that the economy is in bad situation, confirming that the strong advance in the third quarter was largely an artefact of special events, most notably the Olympic Games that was hosted by London from July 27 to August 12.

BOE King mentioned previously GDP will continue in a zig-zag pattern as output is likely to fall sharply in the fourth quarter since the robust growth seen in the third quarter was underpinned by temporary factors.

King said this week that fourth quarter GDP figures will be “considerably weaker” than the previous three months, and he is ready to add to stimulus if needed, King said yesterday.

This week, the IMF slashed growth forecasts for the U.K. by 0.1 percentage points to 1% this year and by 0.3 percentage points to 1.9% next year.

The latest manufacturing data showed that the sector climbed to a 15-month high of 51.4 in December from an upwardly revised 49.2 in November, but services contracted 48.9 in December, the lowest figure since April 2009, from an expansion of 50.2 in November.

On the upside, jobless claims showed a drop of 12,100 in Dec. to 1.56 million, the lowest since June 2011, compared to estimates of having 500 rise and the revised previous of 8,900, which was 3,000 initially. Claimant count rate steadied at 4.8%.

ILO unemployment rate for the three months ended Nov. retreated to 7.7%, the lowest since the quarter through April 2011, recording a drop of 37,000 to 2.49 million, the biggest drop since 2001, similar to both prior and expected readings, whereas employment edged up 90,000 to 29.7 million.

This month, the BOE opted to leave both interest rate and APF quantity on hold at 0.50% and 375 billion pounds, probably waiting for the Funding for Lending (FLS) program to show its effect on the economy, where the minutes of the decision showed a unanimous vote to holing interest rate while David Miles resumed his call for an extra 25 billion of QE.

The BOE said the FLS program is showing "encouraging" signs and is likely to remain BOE`s favorite policy tool to bolster credit to households and businesses, as the central bank relies on it to sustain the recovery.