UK economy shrinks; debt rises

Jan 26, 2012

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Britain’s economy shrunk by 0.2% in the fourth quarter of 2011. Another negative result this quarter would put the economy back in official recession – two successive quarters of contraction – for the second time in three years. Public sector net debt reached the £1trn mark – 64% of GDP.

What the commentators said

Europe is the main culprit, said Philip Aldrick on Telegraph.co.uk. A slide in manufacturing exports undermined growth, which shows that the eurozone is “not putting its hand in its pocket anymore”. Normally it buys 40% of UK goods. A tightening in credit conditions can also be traced to euro-induced jitters in bank funding markets. As for the euro crisis, “it is hard to imagine a silver bullet any time soon”. All the usual problems hampering growth after a credit crunch remain, notably subdued consumption owing to high household debt.

The danger now is that unexpectedly weak growth plays further havoc with the public finances. “Muted economic activity” will be “eating up tax revenues and pushing up unemployment claims” in the months ahead, said Howard Archer of IHS Global Insight.

Given the daunting outlook and lack of effective options to bolster growth, policymakers have resorted to “trying to talk up the economy”, said Aldrick. Hence Bank of England governor Mervyn King’s reminder this week that, “there is no reason to despair… all crises come to an end”.

But if current forecasts are right, said Alex Brummer in the Daily Mail, after another five years of austerity, overall net debt will still have risen to £1.5trn, 75.8% of GDP. That is “really depressing”.

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