What Britain’s awful GDP figure means for your money

By Matthew Partridge Jul 25, 2012

Matthew Partridge

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Last quarter’s (Q2) GDP data is in and it’s bad. No, strike that – 'awful', 'disastrous' and 'dire' are better descriptions.

Economists had expected a gloomy reading, with a 0.2% fall pencilled in. Instead, GDP tumbled by 0.7% (0.8% year on year). This is worse than the 0.3% fall seen last quarter, which also took most people by surprise at the time.

It seems the dreaded 'double-dip' recession is in full swing. As others have pointed out, the government’s plans to cut the deficit assumed strong growth. With the economy now in reverse, these plans seem to be in tatters.

That makes the threat of the UK losing its triple-A credit rating a serious possibility.

So just how bad a mess is the UK economy in? The more detailed figures show that the construction sector did especially badly, with output down by 5.2%. The fact that building companies are getting cold feet about putting up houses and office blocks suggests that the second housing crash we’ve been warning about may be about to start. Activity in manufacturing and services also fell.

So, it’s clear that hopes of a quick return to growth were premature, to say the least. Capital Economics believes that overall growth this year will be 0.5%. It also predicts that growth will be 0.5% next year and 1.5% the year after.

This is below the trend rate for the UK economy. That suggests it’s going to take a long time for GDP to get back to the 2007 peak.

Lead indicators for Britain's economy

Gold/silver ratio:
A warning for the markets		 Where to next for
UK house prices?		 Is Britain's inflation
about to take off?

To be fair, the data may not be quite as bad as it looks. Firstly, the figures were distorted by the extended bank holiday due to the Jubilee, and by the bad weather. While this may seem like a poor excuse, Capital Economics points out that the Royal Wedding is estimated to have cut growth by 0.5%.

The unusually bad weather also halted construction on many building sites. This latter point is important, since other data - such as the purchasing managers index - suggests that the construction sector is in less bad shape.

But there’s no denying that these are nasty figures.

Chances are, this will persuade the Bank of England to start printing more money. At the last meeting the BoE voted to buy £50bn more in gilts, but more is on the cards.

While this might provide a lift for shares when it materialises, we suspect it won’t be great for sterling. As MoneyWeek regular Tim Price pointed out earlier, all this money printing is yet another good reason - for sterling investors in particular - to hang onto gold.

Comments (8)

Published in UK economy | More articles by Matthew Partridge

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  • 1. Colin Selig-Smith

    (25 July 2012, 08:15PM)  Complain about this comment

    What are they thinking? You print money and give it to ... Bankers? Really?

    No, to stimulate inflation and this IS what we're talking about you print money and give it to the unemployed or better, to minimum wage earners.

  • 2. Nick

    (25 July 2012, 08:20PM)  Complain about this comment

    QE is useless. They have printed so much and done nothing but increase the inflation.
    The IR are so low that the whole system is suffering. For how long are we supposed to support the reckless banks and indivinduals? Time for the IR to increase and allow the house market correction to take place.

  • 3. Critic Al Rick

    (25 July 2012, 08:42PM)  Complain about this comment

    As I see things, QE is/was primarily intended to effectively help bailout the Banksters by the back door.

    Power corrupts; absolute power corrupts absolutely.

  • 4. ian

    (26 July 2012, 08:50AM)  Complain about this comment

    The reality of QE is to give a subsidy to banks - and the entire economy (and especially those on pensions etc) pay heavily - as do those in employment and businesses who get taxed on historical profits - so their cash flows are hit as sterling falls and input costs go up.

    It is time that this grossly inequitable redistribution of wealth to bankers is stopped - instead give a short-term tax break to encourage building of new homes for our youngsters. Unless those educated young are encouraged to participate in the economy the long term effects will be disasterous.

    Sack Mervin King - and bring in a non-banker! Split off casino banks and stop the huge tax breaks given to the super-rich. Maybe then the coalition will win the next election.

  • 5. smlaing

    (26 July 2012, 09:17AM)  Complain about this comment

    The masses on the whole care very little as long as those ATM's keep pumping out paper. The Gov knows this. They can purpitrate as much fraud as they like and most will just grumble. The moment those ATM's stop spitting paper, no matter how worthless, the world ends!

    The smart money will have long gone.

  • 6. Bruce Dunn

    (26 July 2012, 12:57PM)  Complain about this comment

    We should print money give everyone between the ages of 16 and 24 £1000. It could be seen as a deferred payment for heaping so much debt on their futures anyway!

  • 7. JREwing

    (26 July 2012, 01:50PM)  Complain about this comment

    The Pound is grotesquely overvalued. It is at least four times overvalued against the Dollar. Instead of I GBP = 1.56 USD, the correct exchange rate should be around 1 GBP = 40 USD cents. This re-alignment may not happen immediately but at some stage, the Pound is going to start dropping like a brick in freefall.

    Currently an ounce of gold buys you just over 1000 pounds. This is a massive overvaluation of Sterling relative to gold. The correct gold sterling ratio is more like 1 ounce buying you 9000 pounds. We are going to get there in the next five years max. If Labour wins the next election (which they almost certainly will), the pound is done for.

  • 8. Douglas Reed

    (27 July 2012, 07:39AM)  Complain about this comment

    The bankers, that is those in asset management for private clients etc., are still to my personal knowledge being paid bonuses in excess of £1m per annum for their role in casino banking.

    As the rich get richer and the gulf widens between rich and poor, the unacceptable face of capitalism seems certain to bring about serious civil unrest and eventual violence.

    Meanwhile this government of idiots preside over an economy in free fall. Yet the banking bonuses continue apace. It reminds me of one of the old Ealing Comedies, only this is tragically fact not fiction.

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