UK falls further into recession, but could euro woes save us?

Osborne blames GDP contraction on euro debt crisis, but one analyst believes EU's travails could save us

LAST UPDATED AT 13:27 ON Wed 25 Jul 2012

THE UK plunged further into recession between April and June with the economy shrinking by 0.7 per cent. The figure is much worse than expected and follows contractions of 0.3 per cent and 0.4 per cent in the two previous quarters.

The British economy has now been in recession since October 2011.

The construction sector was mainly responsible for the terrible GDP figure, according to the Office for National Statistics. Output in this area fell by 5.2 per cent. The ONS is not sure what effect, if any, the constant rain had on the economy.

Chancellor George Osborne blamed the eurozone debt crisis, as he has done in the past. "We're dealing with our debts at home and the debt crisis abroad. We've made progress over the last two years in cutting the deficit by 25 per cent," he said.

"But given what's happening in the world we need a relentless focus on the economy and recent announcements on infrastructure and lending show that's exactly what we're doing."

However, Osborne is facing harsh criticism from economic and political commentators, who are not hiding their horror at the awful data.

Peter Dixon, an economist at Commerzbank, said: "Terrible data. Frankly there's nothing good that comes out of these numbers at all... The economy looks to be badly holed below the water line at this stage."

The Daily Telegraph's Jeremy Warner says that this time, Osborne cannot blame the eurozone debt crisis or the weather. "To say this is politically uncomfortable for Osborne is a gross understatement," Warner writes. He points to the dire performance of the construction sector and calls for planning laws to be swept away to allow builders to build again.

Tory grassroots blog Conservative Home calls the results "terrible". Peter Hoskin writes: "Coming off the back of his Budget, and its subsequent U-turns, George Osborne could have done without so rude a psychic shock. It will set the mood for the summer and beyond: the party conference and subsequent Autumn Statement will have to be about yet more tough choices.

"And it will increase the ferocity of all those questions pecking at No.10: plans for growth, ministerial reshuffles, intra-Coalition relations."

The Week's political columnist, The Mole, considers one of those questions - the possibility of a reshuffle – and observes that Prime Minister David Cameron is now under pressure from his own MPs to give Osborne's job to foreign secretary William Hague.

However, writes The Mole, "Osborne and Cameron are wedded together and switching Chancellors now would look like panic. The Mole hears from senior Tories that he is determined to hold onto Osborne as long as he can."

Meanwhile, at least one economist believes there is reason for optimism. Ranvir Singh of market analysts RANsquawk said that although "no amount of sunshine or Olympic hype can hide the fact this is a black day for the economy", there might be "some light on the horizon, courtesy of our European neighbours".

Singh explains: "With Spain on the cusp of needing a full-blown bailout and with Moody's downgrading the outlook on Germany, overseas investors may look again at UK Plc.

"Therefore signs are beginning to emerge that the slow demise of the euro may well provide an unlikely, but intensely welcome white knight for the UK economy." · 

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