UK recession deeper than first thought

By Norma Cohen and Sarah O’Connor

Britain’s economy contracted even more sharply during the recession than previously believed and its recovery so far this year has been even more anaemic, according to official data on Wednesday that incorporated new information and methodology into the calculations.
 
The Office for National Statistics reported that output fell by 7.1 per cent from its pre-recession peak at the end of 2007 to the trough in the second quarter of 2009. Before the revision the fall had been estimated to be 6.4 per cent. Much of the downward revision reflects the fact that the nation’s private, non-financial companies saw much sharper drops in profitability in 2008 than had previously been reported. Because the decline was so much steeper, recovery actually began a bit earlier than believed in the third quarter of 2009, not the fourth.
 
The recession, according to Peter Lee, statistician at the ONS, “was sharper, steeper and deeper,” than had been believed. Moreover, GDP for the first and second quarter of 2011 were each revised downward. Since the third quarter of 2010, Britain’s economy has broadly stagnated, the ONS said.
 
The new data incorporate important changes to methodology including a change in the way inflation is taken into account and reclassifications of industries.
 
The latest data also showed the toll that economic activity is taking on households; household consumption fell by 0.8 per cent between the first and second quarters of 2011. Over the past year, consumption has fallen by 1.7 per cent.
 
“From the point of view of the consumer, there has been no recovery whatsoever,” said George Buckley, economist at Deutsche Bank, noting that consumption in Britain had fallen further from its peak than that of any other G7 economy. Household consumption now stands 6.4 per cent below its pre-recession peak in the UK. Its closest comparator in the G7 is Japan where it has fallen by 2.7 per cent.

High levels of indebtedness and high inflation are the likely culprits, Mr Buckley said.
 
Richard Barwell at the Royal Bank of Scotland pointed out that output contracted by 3.2 per cent in the six months before the financial crisis erupted in September 2008. “In isolation, those two quarters . . . were worse than the entire 1990s recession in terms of lost output,” he said.
 
However, economists were unsure about how the sweeping revisions to the GDP numbers would affect the Bank of England’s outlook. “It’s very difficult to say concretely at the moment how it does affect the Bank forecasts,” said Philip Rush at Nomura.

Meanwhile, several economists noted that in some respects, the current recession and weak recovery are actually worse than that in Britain in the 1930s. Colin Ellis, chief economist at the British Venture Capital Association, noted that data from the National Institute for Economic and Social Research show the peak-to-trough drop in output during the early 1930s was 7.6 per cent, not far off the current 7.1 per cent drop. Moreover, by this point after the recession began in the 1930s, recovery was already well under way. One more weak quarter and the level of activity in the economy and the amount of time that has passed would make this recession even more severe than that of 80 years earlier.
 
“This means that we had probably better do something pretty darn quick,” Mr Ellis said, noting that the Bank of England was likely to resume quantitative easing in the form of gilts purchases possibly as soon as this week.
 
However, the data also showed that the boom years between creation of the monetary policy committee in 1997 and the end of 2007 were far stronger than anyone, including monetary policy setters, had believed. The economy expanded at an average annual rate of 3.2 per cent during that time, even faster than the 2.9 per cent rate previously believed and which many economists viewed as unsustainably rapid growth.
 
Separately, a closely watched survey of the services sector – the nation’s largest – showed an unexpected improvement for September. The CIPS/Markit survey of purchasing managers showed a headline reading of 52.9 per cent, with a strong pace of incoming orders.
 

British food and drink manufacturers lifted exports by 13 per cent to £5.8bn in the first half of the year, a rare bright spot for the beleaguered industry, writes Louise Lucas.
 
The jump in exports, which put the sector on track for its seventh consecutive year of growth, was led by European nations including the Netherlands and Germany and compares with a sickly domestic market where consumers are cutting back on grocery spending. In March, real sales growth (excluding inflation) of British groceries fell for the first time since 2009.
 
Analysts and investors note that the market is increasingly polarised between manufacturers that export – and are thus better equipped for sustained profitability – and those focused exclusively on the ailing UK market.
 
Melanie Leech, director-general of the Food and Drink Federation, the industry body which compiled the data, called on the government to ensure food producers – the UK’s biggest manufacturing industry in terms of employees and turnover – is able to compete on a level playing field with the rest of the EU.
 
“As the UK’s biggest manufacturing sector, government needs to build on our success and ensure that it supports food businesses, particularly our small and medium sized enterprises, to export great British food and drink products around the globe,” she said.
 
Many manufacturers argue that food is a local product, dependent on domestic culture and tastes, which makes it tougher to export. But others point to countervailing success stories from small companies.

These include Devon-based Westaway Sausages, whose honey roast pork sausages “have proved a particular hit in China where over 300 stores now stock them”, according to the company.

Another company, the Aberdeenshire ice cream and crisp maker Mackie’s, says its haggis and cracked pepper flavoured crisps are going down a storm in the US.
 
“US consumers have reported that they liked all the Mackie flavours but that the Scottish flavours, like haggis, gave a “halo” effect to the whole range,” said Karin Hayhow, Mackie’s marketing director.
 
The biggest single export category in the first half was cereals and bakery, where year-on-year growth was a more modest 3.3 per cent. Sugar and confectionery bucked the trend, down 19 per cent.
 
Ireland is the biggest single export market, buying £1.42bn of food and non-alcoholic drinks in the first half. Exports to Spain and Portugal, two of the most hard-hit European economies, both dropped sharply. China is now just outside the top 20 export countries.
 
Copyright The Financial Times Limited 2011.