Azad Zangana, European Economist
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For professional investors and advisers only. This document is not suitable for retail clients.
The ONS’ preliminary estimate of fourth quarter GDP for 2012 showed the economy contracted by -0.3% –the fourth quarterly contraction in the last five quarters – and worse than city consensus expectations ( 0.1%). Year-on-year growth remains at zero.
Within the details, the construction sector made the biggest positive contribution by growing by 0.3%. However, this was not enough to offset the fall in industrial production of 1.8%. Meanwhile, service sector activity was flat on the quarter.
Part of the negative hit to growth was caused by an Olympics hangover, where the boost seen in the third quarter disappeared. This should be seen as a one-off hit to the economy. However, now that a negative GDP figure has been recorded, there is a significant risk that the UK economy suffers a triple-dip recession. Weak underlying economic activity coupled with the disruption of recent poor weather could cause GDP to fall in the first quarter of 2013.
The external environment is not helping either. The latest leading indicators from France suggest that the recession there is set to deepen, while similar data from Spain and Italy also suggest more downside risks.
As for monetary policy, the Bank of England (BoE) seems to be waiting for more evidence on the effectiveness of the Funding for Lending Scheme. The scheme has helped lower the cost of borrowing for both corporates and households, and has increased the number of higher loan-to-value products on offer. However, demand for borrowing from credit worthy individuals and firms remains low. We expect the BoE to restart its quantitative easing programme in the spring as the economy continues to disappoint. Meanwhile, the sovereign rating agencies are circling. Disappointing growth and recent poor public finance numbers suggest the UK will lose its AAA rating in the near future.
Real GDP growth disappoints
Source: Office for National Statistics, Schroders. 25 January 2013.
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Source: ETFWorld – Schroders
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