Last quarter’s (Q2) GDP data is in and it’s bad. No, strike that – ‘awful’, ‘disastrous’ and ‘dire’ are better descriptions.
Economists had expected a gloomy reading, with a 0.2% fall pencilled in. Instead, GDP tumbled by 0.7% (0.8% year on year). This is worse than the 0.3% fall seen last quarter, which also took most people by surprise at the time.
It seems the dreaded ‘double-dip’ recession is in full swing. As others have pointed out, the government’s plans to cut the deficit assumed strong growth. With the economy now in reverse, these plans seem to be in tatters.
That makes the threat of the UK losing its triple-A credit rating a serious possibility.
So just how bad a mess is the UK economy in? The more detailed figures show that the construction sector did especially badly, with output down by 5.2%. The fact that building companies are getting cold feet about putting up houses and office blocks suggests that the second housing crash we’ve been warning about may be about to start. Activity in manufacturing and services also fell.
So, it’s clear that hopes of a quick return to growth were premature, to say the least. Capital Economics believes that overall growth this year will be 0.5%. It also predicts that growth will be 0.5% next year and 1.5% the year after.
This is below the trend rate for the UK economy. That suggests it’s going to take a long time for GDP to get back to the 2007 peak.
To be fair, the data may not be quite as bad as it looks. Firstly, the figures were distorted by the extended bank holiday due to the Jubilee, and by the bad weather. While this may seem like a poor excuse, Capital Economics points out that the Royal Wedding is estimated to have cut growth by 0.5%.
The unusually bad weather also halted construction on many building sites. This latter point is important, since other data – such as the purchasing managers index – suggests that the construction sector is in less bad shape.
But there’s no denying that these are nasty figures.
Chances are, this will persuade the Bank of England to start printing more money. At the last meeting the BoE voted to buy £50bn more in gilts, but more is on the cards.
While this might provide a lift for shares when it materialises, we suspect it won’t be great for sterling. As MoneyWeek regular Tim Price pointed out earlier, all this money printing is yet another good reason – for sterling investors in particular – to hang onto gold.