UK ‘AAA’ rating at risk as GDP falls 0.3% in Q4

UK GDP contracted 0.3% in the final quarter of 2012, a worse than expected figure that raises the spectre of a triple-dip recession and renewed threat to the country’s ‘AAA’ rated sovereign debt.

Economists had expected a fall of 0.1%, with many pointing to an expected reversal of the “Olympics effect” that had helped the economy grow 0.9% in Q3.

The initial estimate from the UK Office for National Statistics, which added total 2012 growth was flat at 0%, confirms fears already raised by recent disappointing data points relating to the UK economy.

These included poor retail sales at the end of 2012 and a 0.3% slowdown in industrial production seen in November.

Worse-than-expected construction PMI data released earlier this month had also added to suspicions of a Q4 slowdown, though the ONS said today a 0.3% rise in construction activity made it the largest positive contributor on the quarter.

The ONS said falls in oil and gas extraction and factory output placed the greatest downwards pressure on Q4 GDP, pointing to problems with North Sea oil production.

Looking ahead

Though early forecasts for Q1 2013 GDP are more positive, a further contraction would see the UK slip into its third recession since the financial crisis.

The deteriorating economy, coupled with concerns over the safety of the UK’s AAA credit rating, have contributed to sterling falling to an 11-month low against the euro this week.

The pound has also struggled against the dollar since the start of the year, and fell further as the first estimate was published, down from $1.5810 to a five month low of $1.576.

Commenting ahead of the report, Capital Economics’ chief UK economist Vicky Redwood said the unwinding of the so-called Olympics effect – the boost to GDP provided by the London Olympic Games in Q3 2012 – would knock around 0.4 percentage points off the headline figure.

Trevor Greetham, director of asset allocation at Fidelity, said the Q4 figure was indicative of the “weakest recovery in living memory”.

“The more time that passes the clearer it is that America’s gradual and delayed approach to fiscal tightening is the right one. As the IMF belatedly concedes, it is far easier to balance the books when an economy is growing,” Greetham said.

Schroders’ European economist Azad Zangana said he expected the Bank of England to restart its quantitative easing programme this Spring, and warned on the UK’s triple-A rating.

“Disappointing growth and recent poor public finance numbers suggest the UK will lose its AAA rating in the near future.”

 

This article was first published on Investment Week

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