Recession Deeper Than First Feared, GDP Figures Show

The double-dip recession is deeper than originally feared as revised figures today showed a sharper decline in the economy in the final quarter of last year.

Gross domestic product (GDP) shrank by 0.4% between October and December, compared with a previous estimate of 0.3%, while the economy contracted by an unchanged 0.3% in the first quarter of this year, the Office for National Statistics (ONS) said.

The figures mean the current recession - defined as two or more quarters of declining GDP in a row - is more severe than first thought.

The impact of the weak economy was underlined by household spending figures, which showed expenditure falling by 0.1% compared with a previous estimate of 0.1% growth.

The downward revision will heap more pressure on the Government and fuel criticism that Chancellor George Osborne's austerity measures are choking off the recovery.

And in a further sign that the Chancellor's deficit-busting plans are struggling, Government spending grew at its fastest rate in nearly seven years between January and March, the ONS said.

The 1.9% surge in Government expenditure was driven by higher spending on public administration, health and defence.

Meanwhile, the decline in household expenditure in the first quarter was driven by a fall in spending on financial services and social protection.

The decreases were partially offset by spending on food and drink and recreation and culture.

The construction sector declined by a larger than previously estimated 4.9%, its worst performance since the first quarter of 2009.

Industrial production sector output, which includes manufacturing, was also revised downwards to a fall of 0.5% from a 0.4% decline.

Despite the overall decline in GDP, growth in the powerhouse service sector, which makes up 75% of the economy, was revised upwards from 0.1% to 0.2% in the first quarter.

Economists and business leaders have warned that a technical recession will hit confidence and could cause businesses to rein in spending at a time when they are being encouraged to invest to stimulate growth.

But the current downturn is expected to be nothing like as severe as the previous recession of 2008/09, which spanned more than a year.

©Press Association

Bank could relax liquidity rules

The Bank of England is expected to launch the latest plank in its strategy to kickstart lending next week with a move to free up billions of pounds held by banks.

Experts believe the Bank's Financial Policy Committee (FPC) will recommend plans next Friday to relax rules requiring banks to hold large amounts of cash as a buffer.

Members of the committee, which oversees financial stability, have already signalled the move as the Bank looks at ways to get the flow of credit moving.

It would be the next step in the Bank's battle to ward off a tightening credit squeeze, following the announcement last week of a £100 billion-plus scheme to boost bank lending.

The Bank revealed it was working on a new "funding for lending" scheme, while this week it held its first £5 billion monthly auction under a six-month loan facility programme.

Bank governor Sir Mervyn King, who chairs the FPC, hinted on unveiling the schemes last week that the Bank may also look at relaxing liquidity rules.

He said: "In current exceptional conditions, where central banks stand ready to provide extraordinary amounts of liquidity, against a wide range of collateral, the need for banks to hold large liquid asset buffers is much diminished, and I hope regulators around the world will take note."

His deputy Paul Tucker - who is also on the FPC - has said regulators should look at freeing up hefty cash buffers.

It has long been argued that the increasing requirements for banks to keep cash by as a cushion is holding back aims to lend more to the economy. However, it is not thought the Bank is planning to relax capital reserve rules that protect banks in the event of financial stress.

Allowing banks to tap into their liquidity buffers would also allow them to make use of the cash boost offered under the £325 billion Quantitative Easing (QE) programme. The Bank is widely predicted to extend QE in the coming months as the eurozone crisis threatens to make credit more expensive for banks and as they seek to hoard cash.

©Press Association

Bank Of England Offers Loans To Spark Economy

The Bank of England has said it will offer new, low-cost loans to banks to encourage them to lend more money into Britain's shrinking economy.

At a speech in the City of London last night, the bank's governor SirMervyn King blamed the eurozone crisis for "exceptional circumstances" in which banks are struggling to borrow at affordable rates from international markets.

The Bank of England will respond by introducing a new "funding for lending" scheme to provide loans at a cheaper rate than international markets as long as banks use the money to provide credit to households and businesses.

Sir Mervyn said: "It would complement the Government's existing schemes, and tackle the high level of funding costs directly.

"It could, I hope, be in place within a few weeks."

Banking commentator Iain Anderson told Sky News: "Given the stresses in the system at the moment, this is going to have to be a very significant package to make a difference.

"We're going to have to see the detail, we're going to have to see the numbers before we can work out if it can make a difference."

The Chancellor also outlined the Government's proposals to prevent future banking crises and protect depositors' and taxpayers' money in the event of a banking collapse.

George Osborne told City grandees in his Mansion House speech: "I believe that we have found a workable way to solve what I called the 'British dilemma' - protecting British taxpayers in a way that does not make the UK uncompetitive as a home of global banks."

New reforms to banking regulation, based on the recommendations of the Independent Commission on Banking, include splitting high street and investment banks to ensure ordinary savers' money is protected from risky investments going wrong.

Banks will also be forced to hold cash reserves worth 17% of the value of their business to help them keep trading in the event of a bank funding crisis such as that which led to the collapse or Northern Rock in 2008.

But British banks will not have to hold extra reserves on behalf of subsidiaries outside the European Economic Area provided their UK businesses are not be affected by the collapse of those subsidiaries.

The banking industry has resisted the reforms arguing they will push up the cost of doing business and that higher costs will have to be passed on to customers who have grown accustomed to free banking services.

Kevin Burrowes, UK financial services leader at PwC said: "We all want a stable, highly competitive, customer focused UK banking sector.

"The very heavy burden of all this regulation and the management effort required to address it could potentially make our banks uncompetitive globally.

"The rapidly growing financial institutions from emerging markets will seek to exploit the opportunities this gives them."

©Sky News

Longer UK slump looms as manufacturing falters

British manufacturing output posted an unexpected fall in April, raising the risk of a longer recession and turning up pressure on policymakers to take action to boost economic growth.

The Bank of England shied away from injecting more cash into the struggling economy last week, but on Monday central banker Adam Posen called for further purchases of assets, focusing on loans to small and medium-sized companies.

Britain is still suffering from a slump that followed the 2007-2009financial crisis and slipped back into recession around the turn of the year. With the euro zone crisis hitting exports and making companies reluctant to invest and hire, economists fear another quarter of contraction.

The National Institute of Economic and Social Research, a leading think-tank, estimates the economy eked out 0.1 percent growth in the three months ending in May, but an extra public holiday in June could wipe out any increase in quarterly output.

Manufacturing output dropped 0.7 percent in April after a 0.9 percent rise in March, the Office for National Statistics said on Tuesday, disappointing hopes for an unchanged reading.

The wider reading of industrial output, which includes energy production and mining, was unchanged in April after a 0.3 percent drop in March, but also below forecasts.

"Given that the euro zone crisis has intensified since April and recent manufacturing surveys have been very weak, it seems likely that the industrial sector will remain a drag on overall GDP growth for some time to come," said Samuel Tombs, economist at Capital Economics.

Adding to a gloomy picture, the outlook for the British housing market worsened as the euro zone crisis deepened and sales took a temporary hit from the expiry of a tax holiday, while growth in permanent job placements slowed in May and employers said they expected to take on fewer new staff in the months ahead.

In another reminder of how closely Britain's economic fortunes are linked with those of continental Europe, the Society of Motor Manufacturers and Car Traders said the country could produce a record 2 million vehicles in 2015 provided demand from the euro zone held up.

COLD APRIL

Chancellor George Osborne warned on Sunday the crisis in the euro zone was killing off the recovery in Britain, and even members of his own Conservative party have called on him to take stronger action to boost growth.

But Osborne's hands are tied by his pledge to erase the country's huge budget deficit, which is still around 8 percent of GDP, although the coalition government has promised to come up with further steps to unlock infrastructure spending.

Hopes of an early end to the recession had already been dented by a PMI survey showing the manufacturing sector shrank at its fastest pace in three years in May as orders nosedived.

The surprise drop had triggered speculation the central bank would restart its asset purchases, but the BoE held back as concerns over high inflation outweighed growth worries.

"The thing the BoE can do something about is the weak underlying manufacturing activity," said Alan Clarke, economist at Scotiabank.

"That was worryingly weak even before the manufacturing PMI fell off a cliff," he said. "We should brace for a bit more weakness in the months ahead."

Industrial output was dragged down in April by a drop in the manufacturing of basic pharmaceutical products and preparations, as well as in the category of other manufacturing and repair.

A 13.6 percent monthly jump in electricity and gas output during the coldest April since 1989 was offset by a 6.4 percent fall in oil and gas extraction as a North Sea platform was closed after a gas leak.

(This story is refiled to add name of NIESER)

(Additional reporting by Fiona Shaikh; Editing by Catherine Evans)

©Reuters

Osborne in eurozone economy warning

Britain's prospects for economic recovery are being "killed off" by the crisis in the eurozone, Chancellor George Osborne has warned.

In a stark message to the leaders of the 17-nation single currency bloc, Mr Osborne said they were facing a "moment of truth" which could determine the future of the entire continent for years to come.

In some of his strongest comments to date, the Chancellor voiced his exasperation at the repeated failure of the eurozone nations to find a permanent solution to end the financial turmoil.

Writing in The Sunday Telegraph he said: "The lesson of the last two years is that treating the latest symptom does not cure the underlying conditions."

While there were signs a solution to the latest bout of uncertainty in the Spanish banking system was on the cards, Mr Osborne said it would not be enough to end the threat to the UK economy.

"Our recovery - already facing powerful headwinds from high oil prices and the debt burden left behind by the boom years - is being killed off by the crisis on our doorstep," he said.

"I know from talking to British businesses that our country is bursting with entrepreneurial spirit and exciting investment plans that are being held back because of uncertainty about the future. That's why a resolution of the eurozone crisis would do more than anything else to give our economy a boost."

He added: "The British Government is clear that it is strongly in Britain's interests for our biggest export market to succeed; the risks for us of a disorderly outcome are huge."

With the prospect of further turmoil in the wake of the of the forthcoming re-run of the Greek elections, the Chancellor called on the eurozone countries to take decisive action to end the instability. He said: "We are approaching a moment of truth for the eurozone. After more than two years of uncertainty, instability and slow growth, decisions taken over the next few months could determine the economic future of the whole European continent for the next decade and beyond."

He again underlined the need for greater fiscal integration - with more pooling of financial resources and the creation of a banking union - across the currency bloc, saying: "The solution in the eurozone doesn't have to be a full-blown United States of the Eurozone, but if it is to be successful it is likely to include most of the mechanisms that make other currencies work."

©Press Association

UK retail sales slide at fastest pace in 2 years in April

Retail sales fell at their fastest monthly pace in more than two years in April, after a record drop in fuel sales and a weather-related drop in clothing sales, official data showed on Wednesday.

The weak start into the second quarter highlights the ongoing weakness of the economy and may raise speculation about another cash boost from the Bank of England.

The Office for National Statistics said retail sales volumes fell 2.3 percent on the month - its biggest drop since January 2010 and more than twice as fast as forecast. The fall mo re than reversed an upwardly revised 2 percent rise in March.

On the year, sales fell 1.1 percent - confounding economists' forecasts for an annual rise of 1.0 percent.

The ONS said the monthly decline was driven by a record drop in fuel sales following panic buying of fuel in March that had resulted in petrol stations being unable to restock in time in April.

Record rainfall in April meanwhile depressed sales of clothing and footwear, which fell at its sharpest monthly pace since June 2008.

Business surveys had already indicated that the retailers struggled in April, though the CBI survey had also shown that retailers were more confident about the month ahead.

However, with inflation still outpacing meagre wage increases and the euro zone crisis still denting confidence, many Britons remain reluctant to increase spending.

Recent news from major retailers has painted a negative picture of the retail sector's performance.

Britain's biggest clothing retailer Marks & Spencer slashed its sales growth forecast on Tuesday, signalling it expects consumer spending to remain weak as the government focuses on cutting debt and the economy struggles to grow.

Last April record temperatures and an extra holiday for the Royal Wedding boosted retail sales but this year April was Britain's wettest since records began, which is likely to have weighed on this year's figures.

©Reuters 2012