THE BRITISH economy is almost certainly already contracting and set for its first quarter of negative growth since the 1990s recession, economists said yesterday after official data showed stagnant output in the second quarter .
The strong possibility that the UK will suffer two consecutive quarters of negative growth - meeting one definition of a technical recession - will pile pressure on policymakers to ease interest rates, which they have held at 5 per cent since April.
The figures "send a clear signal this economy needs policy support", said Malcolm Barr, economist at JPMorgan.
But the data may not change the Bank of England's central forecast for a year of stagnant output, nor its reluctance to cut rates as inflation nears 5 per cent.
Kevin Daly, economist at Goldman Sachs, said the bank's monetary policy committee had paid close attention to gloomier surveys and was "already more pessimistic on growth than implied by the official data".
Money markets are factoring in a probability of a rate cut by year's end. Yesterday's data did not strengthen those expectations, but sterling fell to its weakest in 11½ years on a trade-weighted basis. Investment, a big contributor to growth in recent years, fell 5.3 per cent quarter-on-quarter - a slump that partly reflects a big drop in housebuilding, but could also suggest that businesses are finding it harder to raise loans.
Household expenditure contracted in spite of relatively strong official data on retail sales that the bank thinks may overstate consumers' resilience. In spite of a weaker pound, trade made a positive contribution to growth only because of a sharp drop in imports.
In the breakdown of output, the Office for National Statistics halved its estimate of quarter-on-quarter growth in the service sector from 0.4 per cent to 0.2 per cent, with the biggest fall in financial intermediation. But service sector output fell in June, putting the most important contributor to UK growth in contractionary territory alongside construction and the production industries.
Whether or not the UK meets the criteria for recession, the more important question is how long and deep the downturn proves to be. George Buckley, economist at Deutsche Bank, said the housing and consumer boom preceding the downturn had been more sustained than in the early 1990s.
"This time round, the strength in consumption, GDP and housing has been over an entire decade . . . It might be a very slow unwinding," he said.
- (Financial Times service)
