UK re enters recession after Q1 contraction

The UK re-entered into a technical recession after a preliminary reading of UK GDP for the first quarter by the Office of National Statistics showed a contraction of 0.2%, meaning two consecutive quarters of negative growth. Most economists had forecast a small growth of 0.1%. The UK saw a contraction of 0.3% in the final quarter of last year.

This is bad news for George Osbourne and David Cameron, particularly given the revelations of the Leveson enquiry, but more so it’s concerning that the UK failed to avoid a double dip recession that many had previously forecast it would avoid. That said, we must remember that this is a preliminary reading and first readings have been shown to change somewhat in subsequent revisions historically. As such, the negative reading is written with a pencil, rather than ink and remains subject to change.Nevertheless, this is still a bad reading.

Clearly the construction output has had an overriding effect in UK growth, with output slumping 3% on the quarter, which is the biggest quarterly fall in construction output since the first quarter of 2009.

Whilst slow growth is a huge issue now in the era of austerity for the Chancellor, one does not feel that the negative Q1 reading is too huge a shock to most investors or the markets. We already had Bank of England member David Miles admit that a negative reading would not be a surprise to him last night and the UK construction figures since the start of the year has long cast a dark cloud over the preliminary GDP expectations as a result.

Indeed, whilst we did see the pound sterling and the FTSE lose ground quickly in the immediate aftermath of the GDP release, the falls were not necessary huge, and this perhaps confirms that the double dip recession the figures from the ONS pertains the UK is now in is more likely to dominate the news headlines than dramatically change investor sentiment in the near term.