Friday, October 24, 2008

U.K. Enters A Recession

After falling to zero in the second quarter, U.K. economic growth turned negative in the third quarter. As it seems highly likely that the economy will shrink in the fourth quarter as well, the U.K. now meets the popular definition of a recession. If they had measured recession on a monthly basis using other indicators (as in the U.S.), the recession would most likely have been determined to have started already during the second quarter as the zero growth in that quarter probably reflected how the beginning of a monthly contraction in the second quarter was masked by the effect of positive growth in the first quarter spilled over into the second (If March output is say 0.3% higher than the Q1 average, then monthly output will have to decline during the coming months to prevent the second quarter growth from being positive).

More specifically, the U.K. economy contracted by 0.5% compared to the second quarter (if expressed in annualized terms as growth numbers in America, that would be a 2% contraction). Most analysts had expected negative growth, but not that negative (consensus was for -0.2%), and so the pound fell sharply after the news. The pound is now at an all time low against the euro, at a 5-year low against the U.S. dollar and at a 13-year low against the yen.

Given how bad the imbalances in the U.K. economy have been and given the general global downturn, there is no reason to expect the fourth quarter contraction to be smaller. Indeed, it will probably be greater.


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