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October 29, 2012

Has UK Escaped The Double Dip?

By Morningstar via QFinance

The UK emerged from a double-dip recession in the third quarter of this year, with the London Olympics and Paralympics helping to power the economy forward, according to the latest official data and estimates. 
The Office for National Statistics (ONS) estimates that the UK economy expanded by 1% between the second and third quarter of 2012, with one-fifth of that growth driven solely by Olympic and Paralympic ticket sales.

The main businesses and industries that benefitted from the "Olympic effect" were hotels and accommodation, as well as the creative arts and the entertainment industry.
Meanwhile, the ONS blames the Olympics for creating a weaker environment for motion pictures, video and TV programme production in the third quarter. "The data here were quite weak for the quarter and there was some evidence from survey respondents to support this weakness - 'people watching the Olympics instead'", it stated.
It's important to note, however, that the "Olympic effect" on the UK economy will not be replicated in the fouth quarter of 2012.
"One has to distinguish between temporary and underlying trends in the UK economy," said Charles Davis, head of macroeconomics at the Centre for Economics and Business Research.
"Indeed, there are reasons to be cautious – the construction sector appears to still be in free-fall, with a further 2.5% quarterly decline in activity in Q3 bringing the sector’s decline over the last year to 10.8%," said Davis.
"In addition, of the 1.0% rise in the whole economy, growth in the Government and other services sector contributed 0.4 percentage points to the rise and the sector’s output stands 2.5% higher than a year earlier.  With the bulk of public spending cuts yet to come, this cannot be sustained," he said. 
"The return to growth is welcome news for the UK economy but unfortunately does not change the big picture that the recovery has been exceptionally weak ... We think the economy would struggle to record growth in Q4 and is likely to contract by 0.1% across 2012."
Other economists have echoed this cautious sentiment.
“Underlying growth in the economy [once you exclude temporary factors] appears to be running at about +0.3% for the third quarter," said Azad Zangana, a European economist at Schroders. "That is not strong enough to shield the UK from the external risks that partly contributed to the latest recession. In our view, the UK remains at high risk of a ‘triple-dip’ recession in 2013 as domestic austerity continues and external demand is hampered by the Eurozone sovereign debt crisis. In addition, there is great uncertainty about the implications of the US ‘fiscal cliff’after the presidential elections in November."
Courtesy Morningstar  via QFINANCE (EconMatters author archive here

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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