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Economy contracts by a shock 0.7%

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25th Jul 2012
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Just days after the Ernst & Young ITEM Club predicted the double dip recession was “over and recovery on the way”, new figures from the Office of National Statistics (ONS) suggest economic output fell by 0.7% between April and June.

The contraction is far worse than expected and follows a 0.3% drop in the first quarter of the year. The preliminary estimate for GDP, which could be revised in the coming months, shows that the economy shrunk for the third quarter in a row and is now 0.8% lower than it was a year ago.

The ONS said the fall was largely due to a construction sector slowdown, but was not yet sure of the effect of the poor weather and the extra June bank holiday.

Joe Grice from the ONS said the underlying performance of the economy was probably better than the headline -0.7% would suggest. "How much that effect might be is something we won't be able to say or to quantify until we have further experience against which to judge," he said.

Chancellor George Osborne said the country faced big challenges, but we need a “relentless focus on the economy” and “recent announcements on infrastructure and lending show that's exactly what we're doing."

The news is also likely to lead to more calls for the government to change its economic tactics, particularly after the International Monetary Fund said that the UK faced "significant challenges" and recommended a ‘plan B’ if there was no significant growth by the end of the year.

Shadow chancellor Ed Balls said the "truly shocking" figures showed the economic plan wasn’t working.

“This short-term boost [the Olympics] is not enough - we need a plan B now to get the economy moving again and radical reforms to set Britain on a new course for jobs, growth and long-term prosperity."

The news of the deepening recession hasn’t come as a surprise to many accountancy firms, such as Deloitte and BDO, who earlier this month put out reports revealing that business confidence had decreased significantly in recent months.

However, the ONS did point to some positive signs for the economy, such as employment which has grown modestly in the past three months.

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By frustratedwithhmrc
25th Jul 2012 20:52

Can't say I am surprised

The clients I speak to all talk of survival and retrenchment. Not seeing anything in the way of 'Green Shoots of Recovery' across my desk.

 

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By tightbarsteward
26th Jul 2012 08:27

Worse to come I think.

I work in construction materials manufacturing and its very quiet, and this should be our busiest time of the year. God knows what winter will be like.

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By justsotax
26th Jul 2012 09:14

Wow if the results of

our economic climate are based upon poor weather then we still have far to drop.....who are these planks at ONS, another government quango paid to put a spreadsheet together and tweak as necessary!?

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Replying to swatt66:
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By frustratedwithhmrc
26th Jul 2012 10:35

The real truth is that the economy has been stagnant since 2009

justsotax wrote:
our economic climate are based upon poor weather then we still have far to drop.....who are these planks at ONS, another government quango paid to put a spreadsheet together and tweak as necessary!?

When you are looking at GDP growth in terms of fractions of a percentage point (i.e. stagnation +/- 1%) then aspects which would otherwise seem inconsequential (like bad weather or an additional Bank Holiday to celebrate the Diamond Jubilee) grow in stature from molehills to mountains.

This is not to say that such economic effects aren't real, but they can be exaggerated by those attempting to make sense of the unconsolidated mass of information available as part of the GDP figures.

In short - I wouldn't read too much into this. GDP is depressed because of a wholesale lack of confidence across all business sectors (although worse in some areas than others).

The failure of various governments across Europe to firmly tackle both the sovereign debt crisis and the Eurozone crisis has led to paralysis in the banking sector. While this continues, leveraged growth and expansion is impossible. The best that business can do is cut costs and overheads to ensure that they are still operating come the upturn.

Without a resolution to the above crises, there can be no substantive upswing in confidence and GDP will continue to flat-line. Whether it is +0.5 or -0.5 is largely irrelevant as the essential fact is that the economy is stagnant - crushed under the burden of too much regulation and too much taxation.

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By Robert Lovell
26th Jul 2012 11:53

The Olympic effect

The British Business Embassy launches today with 4,000 business leaders, policy makers and investors and is expected to be the biggest ever drive to attract investment into Britain.

The summit is designed to promote the UK while London hosts the Olympics.

Nick Clegg said the Olympics presents the UK with a "once in a lifetime opportunity to boost the UK’s growth potential," and David Cameron said ministers hoped it will generate £1bn of UK deals.

But will the Olympics reverse the economic rot?

And how much of an impact will the Olympics have on your business?

Join the debate and find out more in the AccountingWEB Economy discussion group.

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By fionamcke
26th Jul 2012 12:04

Infrastructure Spending

If the UK is not to become a third world economy sooner or later we will need to INVEST in better transport links, more housing and new or better school building and training.

Delay now just leads to higher costs in the longer term. E.g. time and business lost in traffic jams, repairs to crumbling schools, higher housing benefit for high rents due to housing shortages and perhaps worst a lost generation on the dole.

While some projects may take time to begin some projects were already planned and could be resurrected. i.e. school building, flood defence and possibly road building. I understand that many building companies are sitting on land with planning permission and may be able to start building with minimal delay.

The economy gets moving and overall cost savings! Whats not to like?

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John Stokdyk, AccountingWEB head of insight
By John Stokdyk
26th Jul 2012 15:02

Will the Olympic effect reverse the economic rot?

"By shutting down the City until September?" shot back James Hellyer via his @AccountancyEdge Twitter  account.

At least we've seen some infrastructure investment in East London, but with costs in the region of £9bn, (and the interest required to service any resulting government debts), we're likely to see a pretty big hangover, I'll bet. Has anyone seen figures to estimate the overall impacts?

This is certainly something worth investigating further. I think I'll pop over to the Economy discussion group to see if we can come up with anything there.

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By Neville Nagler
26th Jul 2012 15:06

No surprise over GDP drop

Have I missed something obvious re the drop in GDP? The second quarter had 91 days, as did the first quarter. If we assume 5 working days a week and take off bank holidays, the second quarter had 60 normal working days, compared with 64 in the first quarter--a drop of over 6%. So why be surprised if GDP fell by ONLY 0.7%?

Wait till the Olympic effect distorts the third quarter's figures! 

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By vstrad
26th Jul 2012 18:58

A Statement of the Bl**din' Obvious

Shock construction sector slowdown? That'll be because the Olympic Stadium is finished - at least I hope it's finished.

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Chris M
By mr. mischief
26th Jul 2012 21:20

Not all doom and gloom

Whilst the last few years have put some clients under, others are growing strongly.  This covers a wide range of sectors - dance schools, public houses, hotels, builders, property developers.

The people running these businesses generally are much more resilient and postive in the face of setbacks than many of my clients.  For me there are positive aspects of recessions and this is one of them - people with dodgy business models who aren't really capable of changing their ways and methods when the going gets tough get found out.

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By Trevor Scott
27th Jul 2012 12:48

I don't think that many people ....

... have realised that a good part of the economy is unsustainable/fake. With either higher interest rates, reductions in governement expenditure, or inflation, there will be serious problems that impact upon society.

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By ERP_Consultant_Dalbir
28th Jul 2012 13:27

in things we do that we are good at and export, we will be ok

As long as emerging markets can keep their wage inflation in check, demand will continue for our high end consumer goods, video games, financial services, education, cool Britannia tourism and other things we are good at;  we will be ok. 

Dalbir Singh Ahluwalia, FCMA

EalingMA in partnership with Arithmo, Accounting Software for accountants small business clients.

 

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Chris M
By mr. mischief
28th Jul 2012 18:32

3.5% is the latest estimate for worldwide 2012 GDP growth, and given that we are halfway through the year it probably has a smaller expected error than the typical ONS stat.

Europe is still in effect Never Never Land.  A smaller proportion of the UK population still believes there is such a thing as a free lunch - or free pension - and that someone else will fund a nice car, wide screen TV, etc. for them. 

Not many people in China, India, Turkey, Brazil etc. seem to think like this.  My home country Scotland was built on hard-working thrifty guys like Dunlop, Carnegie, McAdam and Watt.  Now it seems to have a worrying proportion of public sector jobs and a dependency culture.

The whole of Europe needs to deal with the fact that the welfare state went too far.  This is a structural change which we either achieve over the next 10 years or we'll just continue our slow passage towards the relegation zone in terms of leading nations.

The majority of my clients are hard-working small business people who make things happen.  The public sector needs to get out of the way, not continually put hurdles in the way with silly town planning, daft forms to fill in for the simplest things, and daft tax rules.  In the absence of a better plan the Government plan of simply slashing jobs - and by definition slashing jobsworths pro-rata - is all we've got.  Ideally we should identify the jobsworths and make a continuation of that atittude a career-threatening decision.

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