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UK GDP contracts a shocking 0 7 in Q2

Article By: ,  Financial Analyst
July 25, 2012 11:38 AM

The Office of National Statistics (ONS) reported today that the UK double dip recession had deepened, with growth contracting 0.7% in Q2 against expectations of a reading of -0.2%. GDP contracted 0.3% in the first quarter of this year.

The GDP reading is a shock pure and simple. A contraction of 0.7% in the second quarter is severely worse than consensus forecasts of -0.2% and whilst it will be inevitable to blame this contraction on poor weather and weak trading over the queen’s jubilee holiday, this reading will highlight the fact that the UK economy is striking some very disconcerting chords at present.

The ONS said that it was hard at this early stage to detail the ‘jubilee effect’ and an admission that the very wet weather also added ‘uncertainty’ to its GDP calculation raised the potential for upward revisions in subsequent readings for Q2 growth. The headlines will read that the UK recession has just got significantly deeper but we should take these numbers with a heavy pinch of salt, for now.

It would not be a surprise at all if there are revisions to this original reading.

Nevertheless, parts of this reading are troubling for the current state of the UK economy. Construction and manufacturing both contracted by 5.2% and 1.4%, their biggest falls since the first quarter of 2009 and the severity of the fall in construction is alarming.

The onus is now very much on the Olympics to help drag the UK economy back from further contractions and whilst there are expectations that  the third quarter could help bounce UK growth somewhat from Q2, we must first see what revisions are made to the original 0.7% contraction thus far.

Market reaction
The FTSE 100 barely moved as investors digested these numbers, perhaps echoing the surprise in the city of London at the scale of the contraction reported. There will need to be some digesting of these numbers.

There was no significant equity sell off in reaction as this deeper contraction increases the potential of more asset purchases from the Bank of England in the near to medium term.  Much of the reaction to these numbers was, however, weighted in the pound sterling, which fell off against the US dollar as a result, hitting its weakest levels in over a week.

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