Economy screeches to halt (AFP)
22.08.2008 16:29 Business
The news is a major blow to Prime Minister Gordon Brown, whose governing Labour Party faces a hammering at the opinion polls, and who had prided himself on economic prudence during his time as finance minister.
In reaction, the pound dropped close to two-year lows against the dollar and London's FTSE 100 index of leading companies surged more than one percent higher, as markets priced in possible interest rate cuts to remedy stagnant growth.
The 15-nation eurozone economy, of which Britain is not a member, also swung towards recession in the second quarter as it shrunk for the first time in its short history, it emerged earlier this month.
Prior to the second quarter, the economy had enjoyed 63 consecutive quarters of expansion, much of which had been under Brown's tenure as chancellor of the exchequer between 1997 and 2007.
Economists said that the latest data left Britain teetering on the verge of a technical recession -- which is defined as two or more quarters of negative economic growth.
"The second estimate of second-quarter UK GDP clearly increases the -- already strong -- chances that the economy will fall into recession over the coming quarters," said Capital Economics analyst Jonathan Loynes.
He added: "The economy now looks set to grow by just 1.2 percent or so this year, with a very strong chance of a technical recession in the second half.
"And things will be considerably worse in 2009."
The reading of 0.0 percent gross domestic product (GDP) growth, which compared to the first three months of 2008, was revised sharply down from an initial reading of 0.2-percent expansion.
It also marked the weakest quarterly growth rate since the second quarter of 1992, the Office for National Statistics (ONS) said in a statement on Friday.
A Treasury spokesman blamed the zero expansion on the global credit crunch and high commodity prices, particularly the soaring cost of crude oil.
Britain also faces soaring inflation, runaway fuel costs and a slumping property market.
"The UK, like other economies, is seeing the consequences of globally high commodity prices, as well as the uncertainty in the credit markets," the Treasury spokesman said.
"The government's priority is to guide Britain through these challenging times, while also supporting those hit hardest as a result of these global factors."
The ONS added on Friday that GDP grew 1.4 percent during the second quarter when compared with the year-earlier period. That compared with the previous official estimate of 1.6-percent growth. The third and final growth estimates for the second quarter will be published in a month.
Market expectations had been for no change for both growth readings.
The sharp downgrade to the quarterly figure "follows downward revisions to the growth in output of the production, construction and services industries," the ONS said in a statement.
Analysts speculated that following the data the Bank of England's monetary policy committee (MPC) could slash interest rates some time soon, after holding borrowing costs at 5.0 percent earlier this month.
"We continue to expect a technical recession in the second half of the year and the MPC to respond with the first in a series of rate cuts in November," said Lehman Brothers analyst Peter Newland.
"We judge that the risks of an earlier move have risen."
In the first quarter of 2008, the economy recorded quarterly expansion of 0.3 percent and an annual growth reading of 2.3 percent.
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