Europe Economy

Doubts Grow About Britain's Exit from Recession

Associated Press

Fears mounted Thursday that Britain may not have emerged from recession at the end of 2009 after all, as statistics showed a dramatic fall in business investment in the last three months of the year.

Sharon Lorimer

The surprise 5.8 percent decline in business investment led many economists to reconsider their expectations that a 0.1 percent rise in gross domestic product in the fourth quarter would be revised upward in new data due out Friday - with some warning of a downward revision instead.

The parlous state of the British economy is expected to be a major issue in an upcoming general election and news that the country has not yet escaped the downturn would be a blow to British Prime Minister Gordon Brown's Labour Party in what is expected to be a closely fought campaign.

The rise in GDP in the last quarter of 2009 had officially ended an 18-month downturn, the country's worst recession since World War II.

It was an early estimate on how the economy fared over the quarter, based on around 40 percent of the data that will eventually form the third and final revision of the figure. Friday's estimate is the second report from the Office for National Statistics - the third update is due at the end of next month.

Before the release of the business investment data, also from the statistics office, most economists had expected a small upward revision in the GDP data, believing the preliminary forecast had underestimated the strength of the recovery.

But the drop in business investment - giving rise to a 24.1 percent fall over the year, the worst annual decline since record began in 1967 - was far worse than anticipated.

While the figures will not be part of Friday's GDP revision, they do - along with downbeat data on retail sales and mortgage lending at the start of this year - suggest the economy is weaker than previously expected.

"The substantial fall in business investment is a horrible surprise and extremely disappointing," said IHS Global Insight economist Howard Archer. "It dilutes hopes of an upward revision on Friday ... and even raises the specter that this minimal growth could be revised away."

Britain was already the last major economy to return to growth after the global credit squeeze. It was hit particularly hard because of its huge banking and financial-services sector centered in London, which had to be propped up by the government's multibillion-pound bailout of major banks, and higher levels of personal debt among consumers. Like the U.S., it also faced a collapsed real estate bubble.

The fallout cost the country 100 billion pounds ($160 billion) in lost output as GDP shrank 5.9 percent from peak to trough. Some 1.3 million people were laid off, unemployment rose as high as 7.9 percent and around 50,000 families had their homes repossessed.

The European Commission added to the bad news on Thursday, lowering its forecast for UK economic growth this year to 0.6 percent, from the 0.8 percent it predicted in November. The Commission kept its broader growth forecast for the 27-country European Union at 0.7 percent.

The Commission's projections are far lower than the British government's own forecasts for growth this year of 1-1.5 percent and further growth of 3.5 percent in each of 2011 and 2012. They also provide a sharp contrast between European growth and International Monetary Fund forecasts of world economic growth of 4 percent and U.S. growth of 2.7 percent.

Bank of England Governor Mervyn King warned earlier this week that it appeared that the recovery from the global financial crisis had stalled in the eurozone.

"This nascent recovery is fragile. The tensions that underlay the build up of large world imbalances have not been resolved," King told a committee of lawmakers. "And, at home, bank lending to the nonfinancial sector continues to fall."