Articles - UK Q1 GDP: UK slips back into recession

 Azad Zangana, Schroder's European Economist, comments:
 "The ONS’ preliminary estimate of Q1 GDP showed the economy had contracted by -0.2%. As this follows a -0.3% contraction in the economy in the final 3 months of last year, it means that the UK economy has slipped back into a technical recession. Year on year growth fell to zero.
 Within the details, the Construction sector made the biggest negative contribution by shrinking by 3%, while output from the industrial sector also fell by 0.4%. However, the biggest disappointment was the service sector which was widely expected to grow by about 0.5%, only managed 0.1% on the quarter.
 Commentators will be quick to question these numbers, and in particular the construction data. However, the final published numbers from the ONS on construction are much more reasonable than had been feared by economists, and so the real disappointment has been the service sector. There is room for revisions to these numbers given that they are early estimates, although we doubt they will be large enough to make this double-dip go away.
 The double dip in recession comes as no surprise to us. We have been forecasting another recession since last November when the Eurozone crisis intensified. Indeed, we are forecasting a further falls in GDP for the second quarter which will be caused by the extra special bank holiday to celebrate the Diamond Jubilee.
 The economy slipping back into recession will come as a blow for both the Chancellor. The Office for Budgetary Responsibility will now have to revise down its forecast, which will worsen the fiscal numbers further. Its too early to call for a reversal of government policy, though these latest results do highlight that the economy will not withstand any further acceleration in cuts. We suspect the Treasury recognises this and is why the Chancellor chose to prolong the cuts into 2016/17, rather than deepening the cuts in the near-term.
 As for the Bank of England, it will be remarkable if the Bank does not respond with more Quantitative Easing. Some of the members of the Monetary Policy Committee have recently adopted a more hawkish tone, suggesting that they are more worried about inflation. However, the adverse impact this news will have on consumer confidence will be important for growth and inflation over the coming quarters. We expect the Bank to extend its Quantitative Easing programme next month by an addition £50 billion."

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