UK economy shrinks; fears of a double-dip recession grow
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UK economy shrinks; fears of a double-dip recession grow

Latest data raises concerns over a double-dip recession and the impending status of the UK's AAA credit rating

The UK's Office for National Statisticshas revealed that the UK's economy has contracted more than expected for the last three months until year-end December 31:

The chained volume measure of GDP decreased by 0.2% in the fourth quarter of 2011

Output of the production industries decreased by 1.2% in Q4 2011, compared with an increase of 0.2% in the previous quarter
Construction sector output decreased by 0.5% in Q4 2011, compared with an increase of 0.3% in the previous quarter

Output of the service industries was unchanged in Q4 2011, following a rise of 0.7% in the previous quarter

GDP in volume terms increased by 0.8% in Q4 2011 compared with Q4 2010

This will no doubt cause some concern of a double-dip recession hitting the UK. It will be especially relevant to see if the UK can hold on to its AAA statusbecause, as Euromoney has reported during the past few months, the jury is still out as to whether it should retain its gold-plated credit rating.

Despite France being downgraded by S&P in January 2011,  the decision in December last year by the rating agency to put France on a negative outlook was enough to fuel angry responses from the French government.

The decision precipitated a memorable outburst by Christian Noyer, the governor of the Central Bank of France, who argued that the UK deserved to be downgraded before France due to its weaker economic fundamentals. His comments focused attention on the comparative states of the French and British economies amid the intensification of the crisis in the eurozone.

And, indeed, his comments were not unwarranted. In Euromoney’s Country Risk Survey, France has consistently received higher (ie less risky) scores from economiststhan the UK across a range of economic and political indicators, suggesting the views of analysts are largely supportive of Noyer’s comments.

At the time, before France was downgraded, Nicholas Spiro, managing director of Spiro Sovereign Strategy, said:

Perceptions of the creditworthiness of the UK and France have been strongly influenced by the deepening crisis in the eurozone. While France has suffered because of its banks’ heavy exposure to southern Europe, in particular Italy, and doubts about its fiscal credibility, the UK has benefited from its autonomous monetary policy and its steadfast commitment to fiscal austerity.


The UK’s AAA rating is more secure, mostly on qualitative grounds. However, Britain’s fiscal position and its private sector balance sheet are in a far worse state than France’s. If it wasn’t for the UK government’s fiscal credibility and its independent monetary policy, the UK’s AAA rating would be much more at risk.

The latest set of data only emphasises these points.

Furthermore, on Tuesday, the Bank of England governor Mervyn King hinted that the central bankwas likely to go through another round of quantitative easing, after official figures from the UK revealed that public sector net debt exceeded £1 trillionfor the first time.

In a speech, King said:

As we head into a challenging year for the world economy, we have seen more positive sentiment in financial
markets, and, at home, a fall in inflation. But none of this implies that 2012 will be an easy year. We begin it
with the level of output more than 10% below a continuation of its pre-crisis trend, and the unemployment
rate at a 15-year high. These are huge changes in our economic fortunes


In addition to the sharp squeeze in real take-home pay, three factors have shaped the economic environment
over recent years, and continue to set the scene for 2012: tight credit conditions, higher household saving,
and the dark clouds hanging over the world economy. The common thread linking them is that each is a symptom
of the debt hangover that followed from the over-extension of balance sheets in the run-up to the financial crisis.

The continuing need for banks, households and nations to reduce their indebtedness is part of the broader story
of the unwinding of the imbalances in the world economy as a whole.

In November, Euromoney explained that if the Bank of England wants to help bring down UK banks’ funding costs, so as to ease credit to the economy, maybe it should start buying UK bank bonds.

Moreover, we also reported that month that a well-regulated banking system has no need for credit easing.

Indeed, UK chancellor George Osborne’s autumn statement at the time begged the question that if he wants to ease credit to UK businesses quickly, he might be better advised to ask why the UK banking system isn’t lending more.


He should look at the picture below, based on UBS estimates, showing the shrinkage of the productive part of Barclays’ balance sheet potentially available to support lending to the UK economy. 





Euromoney also highlighted in November that recapitalization won’t help bank funding.

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