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UK economy flat in Q2

By: | at 08:00 PM | International Trade  

Britain’s current account deficit doubled and the economy stood still in the second quarter of 2008, even before a worsening in what is being described as the worst financial crisis in a generation.

New official figures showed the level of gross domestic product was much higher than had been previously estimated but that could not overshadow a sharp slowdown in economic activity.

GDP was unchanged in the three months to June compared with the previous three months, unrevised from the previous estimate which marked the first time the economy failed to grow since the early 1990s slump. The current account gap widened to 11.0 billion pounds from 5.5 billion pounds in the first quarter.

New methodology, however, has raised the level of GDP by some 19.5 billion pounds. That might have given the government leeway to boost spending without jeopardizing its self-imposed debt to GDP ratio ceiling were it not for other problems.

The public deficit is already wider than forecast and the nationalization of two banks this year is compounding pressure on public finances that are already under strain as slowing growth depresses tax receipts and boosts unemployment benefits.

“We expect the economy to contract in the second half of 2008 and the early months of 2009 as consumers retrench in the face of major headwinds and investment is pared back sharply,” said Howard Archer, economist at Global Insight.

The Bank of England (BoE) has left interest rates at five percent since April but expectations are rising the central bank will cut them next week as confidence crumbles after two of Britain’s best-known banks had to be rescued this month.

BoE Governor Mervyn King, finance minister Alistair Darling, and Prime Minister Gordon Brown were in talks again earlier on Tuesday after the authorities at the weekend finalized the nationalization of buy-to-let lender Bradford and Bingley.

The details of the GDP figures did not augur well either. The saving ratio fell to just 0.4% after a downwardly revised -1.1% in the first quarter.

“For the first time in the 49-year history of the series of this series, households spent more than they earned,” said Paul Dales, UK economist at Capital Economics.

“With real incomes falling, house prices declining and unemployment rising it can’t be long before households stop spending and start saving, resulting in an outright contraction in household spending next year.”

Terry Leahy, the chief executive of Britain’s biggest retailer Tesco Plc, said inflation had peaked and so there was room for interest rates to come down and help “hard-pressed consumers.”

The main reason for the widening in the current account deficit was higher interest payments from UK securities dealers and lower losses recorded by foreign banks with operations in Britain. (Reuters)