One analyst voiced fears about 'misleading' data, while another concluded that 'the light at the end of the tunnel was a train'
The UK economy has slid back into recession, its first double dip since the 1970s. Here is what the City made of the numbers.
Chris Williamson, chief economist at Markit
The UK has sunk back into a recession, if the official first estimate of economic growth in the first quarter is to be believed. However, the underlying strength of the economy is probably much more robust than these data suggest. The danger is that these gloomy data deliver a fatal blow to the fragile revival of consumer and business confidence seen so far this year, harming the recovery and even sending the country back into a real recession.
However, not for the first time, the official data and survey data are sending conflicting signals. PMI surveys suggest that GDP grew at a robust pace of as much as 0.5% in the first quarter. Manufacturing, services and construction all enjoyed solid growth, according to the surveys. Although many headwinds undoubtedly persist, business sentiment has improved markedly since the dark days of late last year, largely attributable to additional action by the Bank of England and ECB as well as an uplift in consumer confidence from the lows seen last year, helped in turn by a drop in inflation. Instead, the official data suggest that services managed to scrape growth of just 0.1%, industrial production fell 0.4% and construction output collapsed 3.0%.
There's a real sense of déjà vu here. A similar situation occurred in late 2009, when the PMI surveys indicated that the recession ended in the third quarter. The good news was soon shattered by the initial release GDP data for that period, which indicated a 0.4% contraction and ongoing recession. However, the ONS have since revised that figure and now estimate that GDP rose 0.2%, confirming the PMI's upbeat message of green shoots of recovery.
As was the case three years ago, there is therefore a worry is that by heralding a double-dip recession, misleading, gloomy official data shatter the revival of consumer and business confidence seen so far this year, and could even drive the economy back into a real recession.
David Miller, partner at Cheviot Asset Management
Investors have been looking to the GDP figures coming up this week as their fear is that should numbers be poor, we could be in for a repeat of July and August last year when the markets sold off. From corporate results this does not feel like a recession. Today's numbers could, however, have a negative effect on consumer and business confidence and so be self-fulfilling as we enter the summer months.
Up until now fiscal austerity has been balanced by monetary expansion through quantitave easing (QE). The MPC's room for manoeuvre has temporarily been curtailed by higher than expected inflation so investors are on their own for the moment.
Overall, the next couple of months will be tricky for investors. Central banks around the world have adopted a more hawkish stance at least until mid-year so we can't expect help in the form of QE. But we must remember that despite the bad growth figures today, they are nowhere near as bad as those in the eurozone. The UK has benefitted from a weaker pound and control of monetary policy (QE).
James Knightley, UK economist at ING
We had been hoping that the service sector numbers would be better, but in the end they grew by only 0.1%. The one consolation we would make is that the official activity numbers for January and February were poor, but there had been better figures for March.
Furthermore, business surveys have indicated that the UK has experienced something of a revival after contracting in the fourth quarter of 2011. Indeed, the British Chambers of Commerce quarterly survey suggested the economy grew by around 0.3% in the first quarter of 2012 while purchasing managers' indices are at levels historically consistent with GDP growth coming in close to 0.5% quarter-on-quarter. Consequently, we are hopeful of possible upward revisions and a return to positive GDP growth in 2Q12.
Deputy Bank of England governor, Paul Tucker, commented recently that the GDP numbers come with a "risk of mismeasurement" because of construction data issues. He indicated that looking at the business surveys may provide a truer picture of the state of the UK economy than the official measure of GDP, which suggests he will not be overly concerned by a disappointing GDP reading. The fact Adam Posen has become far less negative on the UK's prospects suggests he takes a similar view to Tucker. Consequently this is unlikely to significantly alter the outlook for policy with further QE probably not coming through in May.
Marcus Bullus, trading director at MB Capital
It's official. The British economy has gone for a Burton. The government and the Bank of England needed a sharp shock. They just got it.
With inflation proving far stickier than expected, negative growth and a eurozone on borrowed time, the UK economy is in for a very tough few years.
The light at the end of the tunnel was a train. The Labour party will pounce on this data with predictable glee, blaming the spending cuts for the lack of growth. But the one saviour for the UK right now is that the markets back it.
If the markets moved against us as they have Spain and Italy, we would be in a whole lot more trouble. Paradoxically, being technically back in recession could be a good thing as it will force policymakers and government to address the fundamental issues affecting the economy with more urgency. Something needs to be done, and it needs to be done quickly.
Vicky Redwood, senior UK economist at Capital Economics
The UK's back in recession. The 0.2% contraction in GDP in Q1 contrasted with expectations for a small gain and meant that output dropped by 0.5% over Q4 and Q1 together. Admittedly, the fall was driven by a sharp fall in construction output and there are question marks over the reliability of these numbers. That said, the drop in construction was smaller than anticipated and even without this, output would have done no better than stagnate. The main disappointment was the meagre 0.1% rise in services output in Q1 – the surveys had pointed to services growth of 0.5% or more. Admittedly, the MPC indicated at its recent meeting that it will be putting greater weight on the more upbeat business surveys. But we would not dismiss today's figures so readily. And even if the underlying picture is stronger than the official GDP figures show, there is no guarantee that the recent pickup will continue. Indeed, we remain comfortable with our view that GDP will contract by about 0.5% this year.