Research Dept. News
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Monthly Report, num 358 - June 2012
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European union - United Kingdom
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The United Kingdom: readjustment in the economy
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The United Kingdom enters into recession.
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The United Kingdom is continuing its delicate balancing act between declining public and private consumption and stimulating investment and exports and drivers of growth. This process is slow and painful, as highlighted by the figures for gross domestic product (GDP) for the first quarter of 2012. This fell by 0.2% quarter-on-quarter and is the second consecutive quarter of negative growth, because the fourth quarter last year recorded a fall of 0.3%. The economy of the United Kingdom has therefore technically entered recession, although the year-on-year growth rate for GDP has yet to enter negative terrain, standing as it does at 0.0%.
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Leading indicators point to a moderate improvement in economic activity.
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There is no breakdown available of the GDP figures by item of expenditure but there is one by economic sector. Although the data are preliminary and subject to revision, it seems that the construction industry was the main culprit in this fall, down 3.0% quarter-on-quarter, its largest drop since the first quarter of 2009. Manufacturing shrank by 0.1% while services grew by a slight 0.1%, boosted by the sector of transportation, storage and communication.
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From the point of view of demand, household consumption is still weak, as shown by the figures for retail and consumer goods in April, down 2.3% month-on-month and taking the year-on-year rate to 0.4%, this being the lowest growth since January 2010. As well as households being careful with their spending there is an additional factor as sales were hindered by the rain, with April registering the largest rainfall for the month since records began in 1910, according to the country's meteorological office. This factor affected purchases of clothes and petrol, down 5.2% and 3.4% in year-on-year terms, respectively.
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Part of the lethargy in household consumption can be explained by the weak labour market and the deterioration in disposable income for households, as wages are still growing less than inflation and have been for the last four years. Fortunately, the latest inflation figures have been positive insofar as April's consumer price index slowed up, reaching 3.0%, with the previous month recording a rate of 3.5%. We must remember that inflation peaked in the United Kingdom at 5.2% September last year due to the higher energy prices and hikes in indirect taxes. The price index should therefore fall over time due to base effects. The very weakness in demand should also help as it eliminates part of the price fixation power of firms, which need to give discounts and special offers to avoid a greater fall in sales.
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In emerging Europe, while Poland and Slovakia are handling the crisis better, Hungary, the Czech Republic and Romania are suffering more.
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The central government is continuing with its austerity programme, as highlighted by the fiscal deficit figures in April, the start of the tax year in the United Kingdom. Specifically, the deficit stood at 16.5 billion pounds sterling when experts expected this to be higher than 20 billion pounds. The target for the tax year, according to the country's budget, is a deficit of 6.4% of GDP.
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From the point of view of supply, industrial production contracted in April by 0.3% month-on-month and -2.6% year-on-year. However, it's interesting to note the data from the purchasing managers' indices (PMI) both for construction and services, which are at 55.8 and 53.3 points. In both cases they have been above 50 points since the start of the year, a level that indicates expansion of the sector. These data on the economic situation point to moderate growth and suggest that the GDP figures for the first quarter might be revised upwards.
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In short, the economy of the United Kingdom has fallen back into recession and the Bank of England itself predicts that second quarter GDP will fall slightly due to the holding of the Diamond Jubilee celebrations for Queen Elisabeth II. Nevertheless, the Olympic Games will boost economic activity in the third quarter. However, as we are reminded by the International Monetary Fund in its annual report on the United Kingdom, although the economy is expected to consolidate as the year passes, the risks are still markedly downwards.
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