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Britain's deep double-dip raises questions about austerity

May 24, 2012|By Alana Semuels
  • Inflation of the British pound is further constraining consumer spending
Inflation of the British pound is further constraining consumer spending (Chris Ratcliffe )

We knew it was bad, but news out from across the pond indicates that uncertainty in Europe might be slamming the economy there even more than had been thought. Revised data show that Britain’s gross domestic product contracted more than previously believed in the first quarter, indicating that its economy not only entered a double-dip recession earlier this year, but that the drop was also deeper than expected.

Britain’s GDP fell by 0.3% in the first quarter, the Office for National Statistics said, and output in production industries fell by 0.4%. A sharp slide in the stock market knocked 0.7 percentage points off GDP growth, according to IHS Global Insight, indicating that without investor fear the economy might have continued to grow.

Britain, like the rest of Europe, has been implementing austerity measures to cut spending an estimated $130 billion over four years. In 2010, the government announced the biggest cuts since World War II, slashing nearly half a million public-sector jobs and paring department budgets.

Now that austerity measures have helped slow economic growth, governments across Europe are still trying to figure out how to implement austerity measures without completely supressing consumer spending.

“You know that there needs to be some austerity but you also know that you can’t kill the economy,” said Andy Brooks, head of U.S. equity trading at T. Rowe Price. “Finding that balance between reigning in and spending is really going to be the trick.”

Britain's Labor Party used the new figures to urge an end to austerity.

“It’s now clear that this is a recession made in Downing Street by this Government’s failed policies,” said Ed Balls, Labor’s Shadow Chancellor, on his blog. “It did not have to be this way. The Government was warned that cutting spending and raising taxes too far and too fast would choke off the recovery and backfire on the deficit. That’s exactly what has happened.”

Analysts say that its not that simple. Chucking out austerity measures and allowing countries such as Britain to keep expanding their budgets will teach economies that overspending will be forgiven, a mentality that would probably signal an end to the European experiment.

“The Germans are the ones driving the boat. Their mind-set is that we have to hold these other nations accountable for their behavior, we have been sacrificing all of this time,” said Wayne Lin, portfolio manager at Legg Mason Global Asset Allocation. “The leaders of the German people — they can’t say, you know those guys that have partying next door to us, we’re just going to pay their debts. It’s a very difficult political situation.”

Still, though continued austerity may be good for the long-term future of the Eurozone, it also means that economies such as Britain's will continue to lag.

“The economy is finding it hard to return to growth in the second quarter in the face of serious domestic and European head winds,” said Howard Archer, Britain economist for IHS Global Insight.

More uncertainty isnt going to help, Archer said. If Greece exits the Eurozone, consumer confidence and bank lending will probably fall as people wait to see what will happen next. Though IHS predicts 0.4% GDP growth in Britain this year and 1.6% growth next year, uncertainty continues to be the word of the month.

“Hopes of modest sustainable recovery developing during the second half of the year could be scuppered by events in Greece,” he said. “Businesses could well hold back on investment due to heightened uncertainty.”

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