UK in a deeper recession than thought

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By ROBERT BARR, Associated Press

LONDON (AP) — Britain is suffering a far deeper recession than thought, official figures showed Wednesday in a development that is likely to increase the pressure on the government to ease up on its tough austerity approach.

The Office for National Statistics said Britain's economic output shrank by 0.7 percent in the April-June quarter, compared with the previous quarter. That was far worse than the 0.2 percent decline that economists had expected, and confirmed that the British recession has run into a third quarter.

The statistics office said the quarter was likely depressed by an extra day's holiday in June to celebrate the 60-year reign of Queen Elizabeth II. The wettest quarter since records began over 100 years ago is unlikely to have helped either.

Despite the caveats, the figures are likely to be big blow to the Conservative-led coalition government, which on entering office a little over two years ago put deficit-reduction at the heart of its economic program. Many, particularly the opposition Labour Party, think the medicine has been too much and choked the life out of the British economy, which is Europe's third-largest.

"We don't expect much policy response from government after today's news, though pressure will grow for a change of direction," said Scott Corfe, senior economist at the Centre for Economic and Business Research.

British Treasury chief George Osborne again blamed the economy's problems on debts run up by the previous Labour government and the impact of the Eurozone crisis.

"We all know the country has deep-rooted economic problems and these disappointing figures confirm that," Osborne said.

Last week, the International Monetary Fund said Prime Minister David Cameron's government may have to ease up on budget cutting if the economy fails to rebound strongly.

The IMF cut its forecast for U.K. growth this year to 0.2 percent from 0.8 percent, but the latest data suggest even that may be optimistic.

Several analysts estimate the British economy is set to shrink by 0.5 percent over the whole of 2012. By contrast, the U.S. economy, which is itself weak, is forecast to grow as much as 2 percent in 2012.

In annualized terms — which shows what a full year's growth would be based on only the quarter's performance — the latest data show Britain's economy contracting 2.8 percent. U.S. second quarter GDP, to be released Friday, is expected to show annualized growth of about 1.5 percent.

A more detailed look at the U.K. figures showed all sectors contributing to the quarterly decline. Output from the service industries including the financial sector was down 0.1 percent, manufacturing and other production industries were down 1.3 percent and construction fell 5.2 percent.

Britain has been in recession for much of the last four years. Like much of the world, it suffered a deep 18-month recession following the financial crisis. That only ended in the last quarter of 2009. Since the fourth quarter of 2009, GDP has fallen in five of the last seven quarters, and the latest result was the sharpest drop during that time. The technical definition of a recession is two successive quarters of decline.

The figures are at odds with other economic indicators. Unemployment has eased to 8.1 percent in the last report, with 250,000 private sector jobs added in the three months through April. Forward-looking surveys of business sentiment have been upbeat too.

"We can think of no reason why companies would be taking on staff at such an impressive rate if the economy really was collapsing to the extent that the GDP numbers suggest," said Chris Williamson, chief economist at financial data company Markit.

Other analysts suggest that employment enjoyed a short-term boost from hiring to support the Olympic Games.

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