Belfast Telegraph

Wednesday 26 November 2014

George Osborne hails deficit progress as UK sinks deeper in recession

George Osborne:
George Osborne: "We've made progress over the last two years in cutting the deficit by 25%"

Dire construction and manufacturing output drove the biggest decline in UK GDP since the height of the financial crisis three years ago, alarming forecasters who had expected a much smaller 0.2% fall.

An extra day's bank holiday for the Queen's Diamond Jubilee and the wettest April to June period on record played a significant part in the fall, according to the Office for National Statistics (ONS).

But economists said the figures also laid bare an "underlying weakness", with some branding the quarter a "disaster".

It has also been a day of economic gloom in Japan ( which record its biggest half-year trade deficit ever) and in the EU, where the debt crisis pushed the euro down to its lowest point against the dollar in more than two years.

The Japanese Ministry of Finance reported a 2.9 trillion yen (£24.1 billion) trade deficit for the first half ended June 30.

The deficit was triple the size of the deficit reported for the same period last year. First half exports fell 2.5% from last year while imports surged 13.1%.

The latest trade deficit is the biggest since Japan started compiling such records in 1979.

Meanwhile, in Spain's borrowing rates spiked again today, pushing the country closer to needing a financial lifeline.

Investors worry that if Spain has to be rescued, the rest of Europe will not be able to afford it.

The yield on Spain's 10-year government bond spiked above 7.5%, a sign that investors are worried about the country's ability to pay its debts.

Experts believe that those rates are unsustainable in the long run. Greece, Ireland and Portugal had to ask for emergency financial support after their borrowing rates rose above 7%.

Traders also sold the euro after Moody's ratings agency lowered its outlook for Germany, the Netherlands and Luxembourg, saying those stronger countries might have to give financial aid to Spain or Italy.

The euro fell to 1.2061 dollars from 1.2125 dollars on Monday. The euro fell as low as 1.2041 dollars earlier, its lowest point against the dollar since June 2010.

The pound fell to 1.5504 dollars from 1.5521 dollars.

Although the UK GDP figures are a preliminary estimate and may be revised, they show the UK economy has now contracted for three quarters in a row, making it the UK's longest double-dip recession since quarterly records began in 1955.

The last double-dip recession was in the 1970s, when the economy was hamstrung amid soaring oil prices and a miners' strike, but that lasted only two quarters.

Pressure mounted on the Government today to do more to stimulate growth as Chancellor George Osborne faced renewed criticism that his austerity measures are choking off the recovery.

Shadow chancellor Ed Balls said: "These shocking figures speak for themselves. As we warned two years ago, David Cameron and George Osborne's ill-judged plan has turned Britain's recovery into a flatlining economy and now a deep and deepening recession.

"And with Britain just one of two G20 countries in a double-dip recession and borrowing now going up as a result, it is clear that this Government's plan has failed. If these figures don't make the Chancellor wake up and change course, then I don't know what will.

"Thank goodness the Olympics will give our economy a much-needed shot in the arm. But this short-term boost is not enough - we need a plan B now to get the economy moving again and radical reforms to set Britain on a new course for jobs, growth and long-term prosperity. The longer the Chancellor refuses to act, the heavier the price our country will pay."

TUC general secretary Brendan Barber said: "The Government's austerity strategy is failing so spectacularly that it has wiped out the recovery completely."

The UK's economy is 0.3% smaller than when the coalition came to power in the second quarter of 2010, the ONS figures showed.

Mr Osborne said he could not use the Jubilee as an excuse and said the "disappointing" figures highlight the UK's "deep-rooted economic problems".

He said: "We're dealing with our debts at home and the debt crisis abroad.

"We've made progress over the last two years in cutting the deficit by 25% and businesses have created over 800,000 new jobs.

"But given what's happening in the world, we need a relentless focus on the economy and recent announcements on infrastructure and lending show that's exactly what we're doing."

The pound fell against the euro as the data increased chances that the Bank of England will pump more emergency money into the economy or drop interest rates further.

Many economists have questioned the ONS's figures, saying they are at odds with industry surveys and jobs figures, which have been much more upbeat.

Bank of England governor Sir Mervyn King has warned the economy will "zig-zag" this year as special events such as the Jubilee and the Olympics create erratic trends.

And a CBI survey seemed to contradict the ONS figures today as it showed that output in the manufacturing sector was steady in the three months to July.

Andrew Sentance, senior economic adviser to PwC and a former member of the Bank's Monetary Policy Committee, said: "Both employment data and retail sales show a more resilient picture of the UK economy.

"Business surveys have also been pointing to sluggish growth rather than decline.

"However, UK business surveys have weakened in response to the impact of the euro crisis and this is the biggest source of worry for the UK economy at the moment."

Vicky Redwood, chief UK economist at Capital Economics, said there was a possibility that the GDP figures are underestimating the true strength of the economy but added that it would take "pretty hefty revisions" to make the recent performance look even half decent.

She said: "What's more, the UK still faces significant obstacles, not least the knock-on impact of the renewed tensions in the eurozone.

"Even allowing for a decent bounce-back in the third quarter, we still expect the economy to contract by about 0.5% this year and to grow by only 0.5% in 2013."

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