COUNTRY REPORT ON RECESSION IN UK 2012

BY PRANAAY GUPTA

WHAT IS RECESSION?
A decline in activities across the economy, lasting longer than a few months. It is visible in industrial production, employment, real income and wholesale-retail trade. The technical indicator of a recession is two consecutive quarters of negative economic growth as measured by a country's gross domestic product (GDP); although the National Bureau of Economic Research (NBER) does not necessarily need to see this occur to call a recession. - Investopedia So recession is a contraction of business cycle because of a general slowdown in economic activities. A technical recession occurs when the level of real national output declines over two successive quarters causing a contraction in the total volume of production in the economy. But often a sharp slowdown in the rate of growth of output, spending and income can feel like a recession.

CAUSES AND CHARACTERISTICS OF RECESSION

WHAT MIGHT CAUSE A RECESSION?
Recessions have a variety of causes and a wide range of symptoms. Some causes are domestic in origin, stemming from policy mistakes on behalf of the economic authorities. For example, the central bank might allow the money supply to grow too slowly and keep interest rates above the level needed to maintain a steady rate of growth. Higher interest rates have the effect of dampening down spending by both households and businesses and can lead to plant closures and job losses. External shocks can also bring about recession. For example in 1973-74 the large jump in world oil prices caused a sharp rise in cost push inflation and an acceleration in wages. Falling real purchasing power of consumers and a deflationary fiscal and monetary policy from the government sent the economy into reverse.

SOME CHARACTERISTICS OF A RECESSION

Declining demand for output leading to higher levels of spare productive capacity Contracting employment / rising unemployment as firms lay-off workers to control their costs A sharp fall in business confidence & profits A decrease in fixed capital investment spending because there is insufficient demand to justify new capital projects De-stocking and heavy price discounting - this leads to lower inflation Reduced inflationary pressure in the labour market as unemployment rises Falling demand for imports Increased government borrowing

Source : (http://tutor2u.net/economics/content/topics/macroeconomy/recession.htm )

GREAT DEPRESSION UK (1929 32)

The Great Depression of 1929-32 broke out at a time when the United Kingdom was still far from having recovered from the effects of the First World War. Economist Lee Ohanain showed that economic output fell by 25% between 1918 and 1921 and did not recover until the end of the Great Depression, arguing that the United Kingdom suffered a twenty-year great depression beginning in 1918. Relative to the rest of the world, economic output declined mildly in the UK between 1929 and 1934. A major cause of financial instability, which preceded and accompanied the Great Depression, was the debt that many European countries had accumulated to pay for their involvement in the First World War. This debt destabilised many European economies as they tried to rebuild during the 1920s. Britain had largely avoided this trap by financing their war effort largely through sales of foreign assets. Britain had a net loss of 300 million of foreign investments, less than two years' investment on a pre-1914 average. The largest material loss during the war was in the British Merchant Navy, which lost 40 percent of its merchant fleet to the U-boat attacks (but this was replaced soon after the war). Along with loss of assets through enemy action, such divestiture reduced British investments abroad by around 20% by 1918. The resulting loss of foreign exchange earnings left the British economy more dependent upon exports, and more vulnerable to any downturn in world markets. But the war had permanently eroded Britain's trading position in world markets through disruptions to trade and losses of shipping. Overseas customers for British produce had been lost, especially for traditional exports such as textiles, steel and coal. Heavy industries which formed the bedrock of Britain's export trade (such as coalmining, shipbuilding and steel) were heavily concentrated in certain areas of Britain, such as northern England, South Wales and central Scotland, while the newer industries were heavily concentrated in southern and central England. British industrial output during the 1920s ran at about 80-100%, and exports at about 80% of their pre-war levels, so there was little chance of Britain being able to amass enough capital to restore her overseas investment position.
Source : (http://en.wikipedia.org/wiki/Great_Depression_in_the_United_Kingdom )

YEAR 2012 QUARTER 1

GDP went down by 0.2 per cent in the first quarter of 2012, its the second successive period of negative economic growth. The main reason for the fall in GDP was the construction sector, where output had fallen by 3 per cent between the two latest quarters. But the dominant services sector of the economy grew very slowly while industrial production fell slightly. There has been no growth in the economy over the past year and has recovered less than half the output lost during the recession in 2008 and 2009. There were some signs of improvement in the labour market with a very less rise in employment in the latest period and a slight drop in unemployment. But there were mixed results because the rise in employment was entirely among the part time workers, and there was a drop in the number of people employed full time. There was a growth in retail sales volumes in March but this was boosted by purchases of fuel at the end of the month, as well as the effect of unseasonably warm weather. There is a continuous decline in the real earning as a result of the combination of a further decline in average earnings growth and a slight pick-up in consumer price inflation

1. There has been a decline in Oil and gas extraction for several years, and due to which there is a deduction of an average of -0.1percent from GDP in the mining and quarrying . 2. There was a resilient recovery in the manufacturing sector in the middle of 2011 but after that it has contracted by 0.9 per cent. 3. Meanwhile there is a very modest growth in the services sector which accounts for three quarters of whole economy output . Losses and gains in economic output of key sectors during the recession (2008Q1 - 2009Q2) and recovery (2009Q2 - 2012Q1; per cent)

SOURCE: ONS

CONSTUCTION SECTOR
The primary cause of the fall in the GDP was the construction sector In the construction sector there was an estimate fall of 3% between the latest two quarters The construction sector accounts to a total of 7.6% of the GDP And during that period the weakness of the construction sector has accounted for more than half the drop in GDP

Source: ONS As seen above, In the year of 2012 the difference between GVA excluding construction sector an the total GVA is about -0.25.

SERVICE SECTOR
There was a very slow growth in the service sector, it was 1.6 per cent in January to 0.8 per cent in February. Since April 2011 this was the weakest growth and was only the fourth time it has dipped below 1 per cent during the last two years. There were five main subsectors responsible for the weakening of the service sector growth: 1. distribution 2. hotels & restaurants 3. transport 4. storage & communications 5. business services & finance The government and other services being flat, on a month on month basis. It was the only sector to maintain growth similar to previous month.

WIDENED TRADE DEFICIT

In the year 2011 there was a significant narrowing of the trade deficit but the trade deficit widened in January and February and now the trade deficit is equal to the amount that was in November 2011

QUARTER 2

The second estimate of Gross Domestic Product (GDP) for 2012 Q2 reports that the UK economy contracted by 0.4 per cent. Although an upward revision from the first estimate of minus 0.7 per cent published last month, it is nevertheless still indicative of weak economic output. Seventeen quarters after the start of the 2008 recession, GDP growth remains significantly below its historical average and 4.2 per cent lower than its pre-recession peak. GDP growth can be described as broadly flat over the past two years. The preliminary estimate of GDP for the second quarter of 2012 was estimated on the basis of a substantial drop in output in June, largely founded on the experiences in 1977 and 2002 when the Silver and Golden Jubilee celebrations respectively caused identical changes to the pattern of bank holidays. The second estimate of GDP for this quarter now includes real June figures which allow us to have a clearer indication of the impact of the Diamond jubilee celebrations on economic output. Source : Economic Report 2012 (ONS)

CONTRIBUTION TO GDP GROWTH BY INDUSTRY

Reflecting weak domestic and global demand, the output measure of GDP continues to paint a weak picture with contraction broad based across the production, service and construction sectors. Despite an upward revision of quarterly construction growth from minus 5.2 per cent to minus 3.9 per cent in the second quarter of 2012, this sector remained the largest contributor to the negative growth of GDP. Services output, which makes up over three-quarters of total output, contracted by 0.1 per cent in the second quarter of 2012, following a modest growth of 0.2 per cent in the previous quarter. Among the service industries, all major sectors (apart from government) reported a decline in quarterly output with transport, storage and communication recording the largest fall (0.7 per cent in the second quarter). At 0.3 per cent, government output growth remained unchanged from the previous quarter. The production industries recorded a contraction of output with pockets of growth recorded in the utility (electricity, gas and air) sector. SOURCE: Economic Report 2012 (ONS)

CONSTRUCTION SECTOR
There was a fall of 3.9 per cent Construction output in the second quarter of 2012 in comparison with the first quarter of 2012. There was a fall of output fell in eight of the nine sectors reflecting continued stagnation and weakness in the industry. The largest fall was seen in the new infrastructure, which fell by 8.6 per cent on the first quarter of 2012 and by 24.8 per cent compared with the second quarter of 2011, when London Olympic projects were underway. As now the construction projects linked to the Olympics over, the sector is now increasingly dependent on new developments in the housing sector that remains weak at the moment. Additionally, small and medium sized enterprises make up a significant proportion of the industrial make-up making access to finance a potential obstacle to growth. This is particularly significant because in times of economic uncertainly, they may not have the same access to financial markets as larger firms. Cuts in capital investment and weak business confidence have continued to act as a drag on this sector. Output in the construction industry, constant 2005 prices, seasonally adjusted

SOURCE: Economic Report 2012 (ONS)

SERVICE SECTOR
The recent performance of the largest contributing service sector, which is the key source of GDP output growth in the last decade, has remained subdued compared to its historical average. Over the past couple of years, factors such as weak consumer confidence and sluggish real wage growth have contributed to the anaemic performance of the UK service sector. In the second quarter of 2012 total output contracted by 0.1 per cent following a 0.2 per cent growth in the previous quarter. The quarterly growth in the second quarter is unrevised from previously published estimates. Within this sector, quarterly output growth of the main industrial sectors declined in the second quarter of 2012, apart from the government sector which recorded growth of 0.3 per cent in the quarter. Distribution, hotels & restaurants contracted by 0.1 per cent while transport, storage and communication, although revised upwards by 0.7 percentage points, still contracted by 0.7 per cent. Business services and finance (which makes up over 37 per cent of total services) was revised downwards to minus 0.1 per cent in the second quarter of 2012 from the initial estimate of a 0.1 per cent growth. This fall has been mainly due to activities of head offices, management consultancy activities and architectural & engineering activities, technical testing & analysis.

TRADE
Seasonally adjusted, the UKs deficit on trade in goods and services was 11.2 billion in quarter two 2012, compared with a deficit of 7.8 billion in the preceding quarter. The worsening in the deficit is attributable to the increase in the deficit on traded goods, which rose from 25.0 billion in the first quarter of 2012 to 28.3 billion in the second quarter of 2012. Total exports volumes (excluding oil and erratic items) fell by 3.3 per cent in the second quarter while import volumes fell by 0.4 per cent.

QUARTER 3

The economy rebounded strongly in the third quarter of 2012, growing by 1 per cent from the second quarter level which was affected by the Diamond Jubilee bank holiday. Although this was the strongest quarterly growth since 2007, the underlying pattern is one of subdued economic expansion. The economy is no larger than it was a year earlier, even with the benefit of Olympic and Paralympics ticket sales which added 0.2 per cent to the level of GDP in the third quarter of 2012. Other indicators of economic activity paint a mixed picture. The labour market continues to perform strongly. Employment levels reached a record high of 29.6 million in the 3 months to August, although at 71.3 per cent of the working age population it remains well below the peak rate of 73.1 per cent recorded in 2005. Retail sales volumes also rose in September. But exports and industrial production both recorded falls in the latest months figures. Consumer price inflation fell to 2.2 per cent, but the squeeze on real earnings growth persists, albeit at a much reduced rate. Latest public finance statistics suggest that the overall level of public sector borrowing in the first half of the 2012-13 financial year was only slightly higher than for the same period in 2011-12.

Contributions to quarterly GDP growth by industry, 2012 Q2 and 2012 Q3

The growth in output was concentrated in the services sector which grew by 1.3 per cent, the strongest quarterly growth for five years. Production industries grew by 1.1 per cent, contributing 0.2 percentage points to GDP growth in the latest quarter. However construction output fell again, albeit by 2.5 per cent which was less than in the previous two quarters. Chart 2 shows the contributions to growth in the last two quarters, highlighting the relative contributions of the various economic sectors to GDP growth.

The Olympic and Paralympics Games

The Olympic and Paralympics Games are likely to have had an impact on GDP growth in the third quarter of 2012. The largest contribution to services sector growth was in sports activities. This includes the impact of ticket sales for the Olympics and Paralympics, all of which is credited to the quarter in which they were actually used, rather than the period in which the tickets were purchased, in accordance with international reporting guidelines. These added 0.2 percentage points to GDP growth in the third quarter. The employment activities sub-sector (including employment agencies) also grew strongly in the third quarter, perhaps reflecting the take-up of temporary Olympics jobs, as well as greater buoyancy of the labour market. The services sector is likely to have been a beneficiary of the Olympic and Paralympic events held over the summer. The sector grew by 1.7 per cent in August compared to the same month a year ago with government and other services recording the strongest annual growth among the main categories (3.2 per cent). Most of the strength in services is concentrated in sports activities, which as discussed above includes spending on Olympic ticket sales. Output of the arts, entertainment and recreation sector (which includes sports activities) was more than 15 per cent higher in the three months to August, compared with the previous three months. Total services grew by 0.2 per cent in the same period.