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Pound tumbles as recession breaks all records

London, UK (23/10/2009)

LONDON (Management Today) The UKs GDP shrank by 0.4% in the third quarter, confounding expectations of economic recovery.

The surprise bad news means that the UK economy has now shrunk for six successive quarters, making the current recession the longest since records began in 1955. We don’t think that’s the kind of record that would have had Roy Castle lacing up his tap shoes, even if he were still alive.

The pound, which had been making some progress upwards against the dollar and the euro this week, promptly crashed back again following the announcement from the ONS, losing 1.5% against the Euro, rather less against the dollar.

The upset in the figures seems to have been caused by a unexpectedly sharp drop in industrial output, down 0.7%, but even the service sector was off 0.2%. So deflation remains a distinct possibility, and it’s much more likely that the Bank of England will further extend its £175bn policy of Quantitative Easing. Adding more noughts to the already scary amounts of national debt we are running up is not a reassuring prospect.

The GDP results are likely to set some of our most eminent economic forecasters to scratching their heads and licking their pencils, as there was a widespread consensus that growth of about 0.2% could be expected. Maybe they will do better next time, but don’t bank on it.  As legendary US baseball coach Yogi Berra once drily noted, ’Making predictions is dangerous, especially about the future.’

The contraction means that UK economic output is now back at 2005 levels, fuelling fears that the downturn here is going to be substantially longer and deeper than elsewhere – France and Germany have already returned to modest economic growth. Bank of England deputy governor Paul Tucker warned that even when it did come, any recovery was likely to be ‘anaemic’ and that the true picture of the nation’s economic prospects will only emerge in Spring or Summer of next year.

Overall this news makes pretty grim reading, suggesting as it does that even those glass-half empty types who were predicting a ‘double dip’ might have been overly optimistic. The first dip is not over yet, and is going to longer and more severe than we were expecting.

The only slight glimmer of hope is to be found in some alternative economic measures, where results are not quite so gruesome. The purchasing managers indices, for example. These rather less well-known measures of output report the numbers of purchasing managers in a given sector reporting better, worse or stable trading conditions, and have been cited by some in authority (including the BoE itself) as being more reliable than GDP, subject as it is to frequent updates and revisions.

The Q3 PMIs for manufacturing, construction and services are consistent with very slight economic growth, so perhaps all is not quite lost. All the same, it’s hard to be anything other than disheartened by this news – we’re not out of the woods yet.
 
For more information, please visit: http://www.managementtoday.co.uk/channel/Finance/news/947825/pound-tumbles-recession-breaks-records/


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