U.K. in recession for 2nd time since 2008

@CNNMoneyInvest April 25, 2012: 10:34 AM ET
The UK economy slipped into recession in the first quarter with a second consecutive drop in GDP.

The United Kingdom's gross domestic product slipped for two consecutive quarters, raising fears of another double dip.

NEW YORK (CNNMoney) -- Britain's economy declined for the second straight quarter, the U.K. government said Wednesday, in a sign that the nation has entered a recession for the second time in four years.

The gross domestic product fell by 0.2% in the first three months of 2012 compared with the final quarter of 2011, according to initial estimates from Britain's Office for National Statistics. That followed a 0.3% drop in the fourth quarter.

The decline means the British economy is technically in a recession, defined as two consecutive quarters of economic decline. But economists said the initial estimates are based on incomplete data and will probably be revised.

"We are hugely skeptical about the first-quarter GDP data," said IHS Global Insight chief European and U.K. economist Howard Archer.

Given the uncertainty, economists do not expect the Bank of England to announce any additional stimulus measures at its next meeting in May.

A sharp decrease in construction activity led to the overall decline in the first quarter. Construction dropped by 3% during the three-month period, following a 0.2% dip in the prior quarter.

The 3% decline "tests the bounds of plausibility," said Philip Rush, an economist at Nomura Securities.

"The construction data have been so volatile that they have been distorting headline growth rates," said Rush.

Excluding the questionable construction data, the U.K. economy was flat in the first quarter, according to Brian Hillard, an economist at Societe Generale.

While that would mean the economy is not technically in recession, it's "hardly a result to cheer about," he said.

In particular, the services sector shrank 0.1% in the quarter.

Manufacturing was anemic, slipping 0.1% in the first quarter, after sliding 0.7% in the prior quarter.

The weakest sector of the GDP was mining and quarrying, which fell 3.6% in the first quarter.

The strongest industry was the utilities -- electricity, gas, steam and air -- which grew by 1.3% in the first quarter. But that could be contributing to a pullback in consumer spending, because of the higher cost of utilities.

The British Retail Consortium said that consumers are cutting back on spending because they're getting squeezed by high fuel and utility bills, even as the rate of inflation is triple the rate of average wage increases.

"The U.K.'s return to recession is a blow to the retail sector at a time when a boost to consumer confidence is desperately needed," said the consortium, in a media statement.

Going forward, Driver said that Britain is going to need a jumpstart from the London Olympics this summer in order to get its economy going again.

"The light at the end of the tunnel is that the U.K. economy should pick up in the second half of the year, assuming the Olympics delivers the boost to growth that is expected," he said.

Markit analyst Chris Williamson said the preliminary GDP report might not be as bad as it seems, pointing to conflicting data from the purchasing managers' report for March that suggested that Britain experienced economic growth, not recession.

But any positive data hardly matter, he added, if the depressing GDP report succeeds in dragging down British confidence in the economy.

"The danger is that these gloomy data deliver a fatal blow to the fragile revival of consumer and business confidence seen so far this year, harming the recovery and even sending the country back into a real recession," said Williamson.

Caxton FX analyst Richard Driver said that the 0.5% contraction over the last six months "paints a pretty depressing picture and confirmation of the dreaded double dip is likely to weigh on domestic consumer confidence."

Driver said that Prime Minister David Cameron will have some explaining to do, as the specter of a double-dip recession harkens back to the financial crisis of 2008, which dragged Britain into a recession that lasted until mid-2009.

In 2010, U.K. Chancellor of the Exchequer George Osborn unveiled the country's harshest budget in decades. The five-year plan aims to eliminate major parts of the annual deficits by 2015, and to ensure that the country's debt will begin to fall as a percentage of GDP.

But critics say the spending cuts and tax hikes have undermined the economy at a time when unemployment is on the rise.

"Cameron will certainly have plenty of questions to answer, particularly regarding the U.K.'s soaring unemployment levels," said Driver. To top of page

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