An across-the-board drop in construction, production and services dragged the economy deeper into double-dip recession in the second quarter and put Britain at risk of suffering its third annual decline in output in the past five years.
City analysts said that without a surge in the second half of the year, there was little chance of achieving the 0.8% increase in gross domestic product pencilled in by the independent Office for Budget Responsibility at the time of the March Budget.
The dismal GDP figures followed a downgrade of the UK’s economic prospects from the International Monetary Fund last week, which put UK growth in 2012 at 0.2%. The economy contracted by 1.1% in 2008 and 4.4% in 2009 before recovering less than half the lost ground in the following two years.
“Although some temporary factors pulled down output, it looks like there was some underlying contraction too”, said Vicky Redwood of Capital Economics. “Even allowing for a decent bounce-back in Q3, our forecast for a 0.5% fall in GDP in 2012 as a whole looks on track.”
Weakness in construction, which accounts for 7% of national output, contributed 0.4 percentage points of the 0.7% decline in GDP between the first and second quarters of the year, according to figures from the Office for National Statistics.
Officials said the workload on Britain’s building sites decreased by 5.2% between March and June, the biggest quarterly fall since early 2008, although the ONS warned that its “flash estimate” was based on incomplete data.
Factors behind the contraction in construction are believed to be the end of work on the Olympics, lower government investment on public infrastructure, the continued low level of private house building and the unusually wet spring weather. Output in the second quarter of 2012 was almost 10% lower than in the same three months of 2011, but some analysts said the ONS figures were much worse than had been suggested by surveys of building firms.
Joe Grice, the chief economist at the ONS said: “It does seem to make sense particularly in construction that weather would have had an adverse impact”.
In a blow to the government’s hopes of rebalancing the economy towards manufacturing and exports, industrial production slipped by 1.3% between the first and second quarters, contributing 0.2 points to the overall decline in GDP. Manufacturing, which accounts for a little more than 10% of the UK’s national output, posted a 1.4% drop as the sovereign debt crisis in the eurozone and the squeeze on consumer incomes from inflation hit demand for goods from UK factories.
Services, by far the biggest sector of the economy, also went backwards in the second quarter. Spending in hotels, restaurants and shops was depressed, according to the ONS, although the biggest decline was in the transport, storage and communication sub sector. Business services and finance posted a 0.1% quarterly rise, while the public sector increased its output by 0.3%. Overall, services were responsible for 0.1 points of the 0.7% fall in GDP.
Although some analysts said the impact of the extra bank holiday to celebrate the Queen’s Diamond Jubilee shaved 0.5 points off growth in the second quarter, the ONS said it was hard to put a figure on the impact of the loss of a working day.
Michael Saunders, UK economist at Citigroup said construction had been boosted in 2010-11 by the Olympics programme and had now suffered its second sharp decline in a row. “It is a common pattern among Olympic host countries that GDP growth slows as construction projects wind down. Second quarter growth also probably was hit by the extra bank holiday for the Queen’s Jubilee.
“But, the weakness in GDP cannot be wholly attributed to such special factors. The economy has basically flat-lined for two years and, with household deleveraging, heavy fiscal drag and weakness in key EMU export markets, we expect that the economy is likely to be roughly flat for the next 12-18 months as well.”