The UK economy is back in recession, its first double-dip recession since the 1970s, following a surprise 0.2% drop in GDP in the first quarter of 2012. Analysts had anticipated modest growth of 0.1-0.2%. The pound dropped following the news as markets expect that the Bank of England will be forced to resume its quantitative easing programme, having earlier hinted that it would no longer be necessary.
The news could not come at a worse time for the British Government and in particular the Chancellor of the Exchequer, George Osborne who has stuck rigidly to an austerity programme, claiming all along that it is the best medicine for the ailing British economy. The economic data would suggest otherwise, however, and plays into the hands of the Labour party, which has maintained that the Conservative party’s swinging cuts have been squeezing the life out of the economy and inhibiting growth.
The British economy shrank for a second consecutive quarter in the first three months of 2012, meeting a widely-used definition of recession, according to data released Wednesday by the U.K. Office for National Statistics. The UK economy contracted for a second consecutive quarter which fits the widely-used definition of recession.
On Tuesday, British public sector borrowing was higher than expected in March, totalling 18.2 billion pounds, the U.K. Office for National Statistics reported. Economists had forecast borrowing of £16 billion. The pound shrugged off weak public finance data as gross domestic product data was the key release for the pound this week.
Sterling retreated from a 7-1/2 month high against the dollar and fell against the euro on after data showed the UK economy had slid back into recession, keeping alive the chances of more monetary stimulus from the Bank of England. But losses were likely to be limited by the view that Britain still has a better outlook than the neighbouring euro zone and by expectations that U.S. Federal Reserve chief Ben Bernanke had a dovish tone as he announced that the FOMC will continue with its current plans and make no changes at this time. He said that the recovery was uneven and that the Fed was keeping a tight watch.
Traders reported sovereign investors buying the pound on dips.
Data showed Britain’s economy slipped back into recession as output contracted by 0.2 percent in the first three months of this year. Sterling was last down 0.2 on the day at $1.6116, having dropped to a session low of $1.6082 after the GDP release. It traded well below the peak of $1.6172 struck earlier in the day, its highest level since early September. Traders cited stop loss orders below $1.6080.
The euro rose to a session high of 82.22 pence from around 81.87 pence before the data release, with traders saying offers above 82.20 pence were likely to check gains.
