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April 25, 2012 6:59 pm
It’s official. The UK is in a double-dip recession. The data are noisy and revision-prone, and the definition of “recession” – two consecutive quarters of contraction – is arbitrary and unhelpful. Forward-looking business confidence surveys, rather than backward-looking output data, suggest an improvement is under way. Still, this ugly landmark looks meaningful. The most erratic figures, for construction, came in much better than conventional wisdom had anticipated. The big reason why UK gross domestic product recorded a marginal contraction in the first quarter, and not a marginal expansion, was disappointing growth in business services and finance.
And any revisions will not alter the historical fact that this is the slowest recovery in a century. UK GDP remains 4.3 per cent below its peak, four years ago. Even in the 1930s, the economy had made good all of its losses by this point.
View this in combination with the latest figures for both headline and core inflation, which have ticked up without even reaching the upper band of the Bank of England’s target, and the UK economy appears barely less troubled than the eurozone’s, despite the advantage of printing its own currency.
Markets do not seem bothered. Sterling reached a seven-month high against the dollar and gilt yields rose. Traders believe that another dose of “QE” bond purchases from the BoE is now off the table. Inflation data, and the recent capitulation by the central bank’s biggest dove, support them. But they should not be so sure.
Some policy response is needed politically. Either the government will humiliate itself with a historic U-turn and rein in its spending cuts, or the BoE – despite everything – will resume its bond purchases and hope that they will work. The latter is far more likely. Note well, all who trade sterling.
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