Austerity bites: British economy contracts

The Office of National Statistics' figures on the British economy were not hugely surprising. Economists had been expecting a contraction of some kind.

The Financial Times surveyed a group recently and they thought the economy would shrink by 0.1 percent.

The prospects for another contraction this quarter are high. The FT report notes construction and manufacturing activity are down. With sizeable lay-offs coming in the public and private sector, as I blogged recently, the prospect of a double-dip recession is increasing in probability.

James Knightley, UK economist at ING, told The Guardian:

"Unfortunately UK economic activity is likely to get worse before it gets better with a technical recession likely to be confirmed by first quarter 2012 GDP numbers. Household spending is constrained by the fact that wages have failed to keep pace with the cost of living for four consecutive years while job insecurity is rising once again. At the same time, austerity measures mean government spending will contract and the Euro zone sovereign debt crisis is hurting exports to the UK's largest trading partners. With such economic uncertainty, firms are reluctant to invest and hire so it is difficult to see where any growth will come from in the next couple of quarters."

Knightley did think that the second half of the year looked better. It should. London is hosting the Olympics and that should bring in plenty of tourist revenue and generate that elusive "feel-good" factor that makes consumers want to shop.

There is also this news on the unemployment front. McDonald's has announced it will be creating 2,500 new jobs during the course of 2012. That's not quite enough to make a serious dent in the 1 million under-25's who are unemployed, nor is it going to make a huge impact on GDP growth. But as austerity bites deeper it is better than nothing.

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