Business | Economy

Recession rages as spending stagnates in UK

No recession respite as UK services stagnate

  • Reuters
  • Published: 00:00 June 30, 2012
  • Gulf News

London: Britain's dominant service sector stagnated in April and an extra holiday and festivities for the Queen's Diamond Jubilee failed to lift consumers' spirits, data showed on Friday, giving little hope of an escape from recession in the second quarter.

The gloomy news strengthens expectations the Bank of England will restart its printing presses when it meets next week and provide further stimulus to an economy that sank back into recession around the turn of the year.

Output in the services sector -- which ranges from banks to hotels to airlines and accounting for some three quarters of output -- was flat on the month after growing 0.6 percent in March, the Office for National Statistics said, offering the first official glimpse of how the sector fared in the second quarter.

"Flat services output in April is another blow to hopes that the economy may have avoided further contraction," said Howard Archer at IHS Global Insight.

The central bank has warned that the economy may shrink again in the current quarter because the extra holiday for the Jubilee would hit manufacturers and many service firms' output.

Purchasing managers' surveys are a bit more upbeat than the data. They suggest that Britain's service sector grew at a steady pace in May but manufacturing output braked sharply. Reports for June next week are expected to paint a similar picture.

But after a shock contraction in the first three months of 2012 pushed the economy back into recession economists see tepid growth ahead at best, with only a mild bounce next quarter from London's hosting of the Olympic Games and the subsequent tourism and ticket sales.

Faced with a struggling economy the BoE is expected to flood the market with another 50 billion pounds of cash next week as falling inflation gives it more room to manoeuvre.

Having slashed rates to rock bottom the Bank has already pumped 325 billion pounds into the economy through its quantitative easing asset-buying programme, designed to stimulate growth by cutting long-term lending costs.

But bank governor Mervyn King has warned that a "black cloud of uncertainty" was keeping businesses and consumers from spending, while driving up banks' funding costs.

"Uncertainty and tighter credit conditions have acted as strong headwinds to our recovery," King said in a media conference presenting the BoE' financial stability report.

The central bank said regulators would ease liquidity requirements for banks, in order to allow for more lending. In addition the government and the central bank are launching a scheme to provide cheaper funding to banks.

The government and the BoE had hoped falling inflation, which eased to 2.8 percent in May, would provide more households with the scope to increase spending this year but the main drag on services output was a 2.4 percent slump in retail output.

Britons have been cutting back spending in the wake of the 2008/2009 slump after unemployment rose and high inflation ate away meagre wage increases while unusually cold and wet weather in April kept shoppers from buying summer clothes.

Consumers were more amenable to buying bigger items such as furniture or electrical goods this month but their assessment of the economic outlook worsened, a survey showed.

Researchers GfK NOP's headline consumer confidence index held steady at minus 29 in June. "The stagnant level of consumer confidence suggests that the public is stuck in a period of constant depression," said Nick Moon, managing director of GfK NOP Social Research.

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