UK Stuck in Recession

October 24, 2009
U.K. Stuck in Recession as Euro Area Shows Strength
By MATTHEW SALTMARSHPARIS — The British economy remained mired in recession during the third-quarter, according to data released Friday. That stood in stark contrast to the euro area, where reports showed steadily improving activity.
A significant reason for the divergent performance between the economies appears to be the larger debt burden of British consumers, analysts said.
A preliminary report from the Office of National Statistics in London showed gross domestic product contracted by 0.4 percent between July and September from the previous three months, and it shrank by 5.2 percent compared with a year earlier.
The British economy has now contracted for six successive quarters, making this the longest downturn since the agency started its data series in 1955.
Economists had expected growth of 0.2 percent for the quarter, based on recent improvements in housing statistics, purchasing managers’ indexes and the wilting pound, which should make exports more competitive.
Rather, the report showed weakness in the service sector, where output fell 0.2 percent; industrial production, down 0.7 percent; and construction, off 1.1 percent.
Britain is starting to further lag the 16-member euro area, where France and Germany are leading steady improvements in manufacturing, services and consumer demand.
Jean-Michel Six, chief European economist at Standard & Poor’s, cited consumer indebtedness as the main factor undermining a recovery in Britain.
“U.K. consumers are coming out of a period of very significant leveraging, and the process of unwinding that is long and painful,” he said. “You would expect savings rates to grow and credit demand to fall, weighing on the economy.”
Meanwhile, German business confidence in October rose to its highest level in 13 months, according to the Ifo economic research institute in Munich.
Its business climate index, which surveys 7,000 executives, rose to 91.9 from 91.3 in September. The index touched a recent low of 82.2 in March.
“The third quarter was a good quarter for the German economy,” said Carsten Brzeski, an analyst at ING. “Probably even an excellent quarter.”
He said German companies were benefiting from the pick-up in global activity, stock rebuilding, stimulus-driven private consumption and tax relief.
Another report, from the data firm Markit, showed a composite index of manufacturing and services industries in the euro area improved to 53 in October from 51.1 in September.
The reading was the highest in 22 months, Markit said.
Chris Williamson, Markit’s chief economist, said the data “indicate that the euro-zone economy has entered the fourth quarter on a strong note” and were consistent with G.D.P. rising at a quarterly rate of around 0.4 percent in October.
In France, the national statistics office INSEE said that consumer spending jumped 2.3 percent in September from August, well above expectations of a 0.5 percent rise.
Another release Friday, from the E.U. data agency Eurostat, showed that industrial orders in the euro area increased by 2.0 percent in August from July, but were down 23.1 percent from a year earlier.
Still, Mr. Six of S&P cautioned that smaller euro-area economies like Spain, Ireland, Greece and Portugal have not shown the level of resilience of the two largest members of the currency bloc.