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Don’t Read Too Much Into UK GDP Gloom: Economist

Matt Clinch, special to CNBC.com
Wednesday, 25 Jul 2012 | 9:58 AM ET

New figures showing the U.K’s gross domestic productfalling by 0.7 percent in the second quarterfrom the first should be taken with a pinch of salt and call into account the credibility of this data, James Knightley, UK Economist at ING told CNBC.

Tower Bridge and City of London financial district
Source: Dominic Burke | Getty Images
Tower Bridge and City of London financial district

The Office for National Statistics said on Wednesday in preliminary data that British economic output shrank much more than expected in the second quarter of 2012.

The contraction was the biggest decline since early 2009 and is 0.8 percent lower than at this point last year.

The data suggests that the U.K. economy is shrinking on an underlying basis but unseasonal wet weather and an extra public holiday for the Queen’s Diamond Jubilee are thought to have added further pressure.

These figures mark a third consecutive quarter of contraction but Knightley is unconvinced that the U.K. is in recession.

“I just don’t have that much faith in this first release of GDP data,” he told CNBC’s “Worldwide Exchange”.

“I don’t think it really alters the picture that much, especially when you look at what’s happening in the other data, and the other data in the U.K. is far, far stronger than this,” Knightley said, adding that unemployment in the U.K. had fallen to 8.1 percent in the March-May quarter, down from 8.3 percent in the previous three months.

“It’s not just the employment numbers, the PMI numbers have been reasonably good. I think it’s more consistent with a flat lining economy rather than a deep-seated recession that the official data is suggesting,” he said.

Credibility Issue With UK GDP Number: Expert
"This is a very early estimate only based on about forty percent of the actual final GDP data we will be getting, this has been revised dramatically in the past, so I don't think it really alters the picture that much especially when you look at what is happening in the other data which is much stronger," James Knightley, economist at ING Wholesale Banking, told CNBC.

Media outlets have reported that the boost in job data could be due to the Olympic Games coming to London this summer. Knightley doesn’t believe this to be the case.

“It’s not going to boost employment in the north west [of England] all that much, it’s not going to be boosting employment in the East Midlands all that much, yet we’re seeing employment gains right across the U.K. right now,” he said.

Knightley was also quick to point out that this initial GDP figure is an estimate based on 40 percent of the final data and on average it has been revised by 0.4 percentage points in the past.

He predicts inflation will continue to fall with households not being squeezed as much as they were which would lead to growth for 2013.

Rather than quantitative easing (QE), Knightley was keen to focus on the Bank of England’s new lending schemewhich aims to help firms and households.

“In November you might get a bit more QE but we’re really looking how this ‘funding for lending’ scheme kicks in. Can that be a big boost to access to credit and actually get borrowing costs down which would be more of a boost for the U.K. economy,” he said.