UK ‘already in recession’, as eurozone crisis hits exports

The Ernst & Young ITEM Club and the Centre for Economics and Business Research (Cebr) both believe that gross domestic product (GDP) shrank in the final quarter of last year and will fall again in the first three months of 2012.

A recession is defined as two consecutive quarters of contracting output.

The prospects for the economy in the UK are closely tied to the fate of the eurozone, according to both reports, which is hitting the export trade so crucial to the country’s recovery.

The warnings come shortly after France, the second biggest economy in the eurozone, saw its AAA credit rating downgraded by Standard & Poor’s (S&P), in a move which signals more troubles for the single currency bloc.

Yesterday, in his first public appearance since the downgrade, French president Nicolas Sarkozy avoided mention of the loss of the prized AAA status, but called for courage, calm and unity to overcome the financial crisis, and he promised new reforms.

Meanwhile, Foreign Secretary William Hague said the downgrades required Britain to “redouble our efforts” to boost economic growth.

He claimed the renewed questions over the credit-worthiness of countries, including France, also demonstrated the importance of the coalition government’s deficit reduction strategy.

Presenting the latest report on the state of Britain’s economy, Professor Peter Spencer, chief economic adviser to the Ernst & Young ITEM Club, said: “Figures for the last quarter of 2011 and the first quarter of this year are likely to show that we are back in recession and we are going to have to wait until this summer before there are any signs of improvement.”

But he added: “ It’s not going to be a repeat of 2009 – we are not going to see a serious double dip.”

The ITEM Club report forecasts GDP growth of just 0.2 per cent this year, before increasing to 1.8 per cent in 2013 and 2.8 per cent in 2014.

The ITEM Club said deteriorating levels of confidence will see business investment stagnate in 2012, while export prospects have already slowed. However, the group said UK companies had stronger balance sheets than in 2009 and had built up large cash stockpiles, which would provide a useful insurance policy if the situation deteriorated further.

The ITEM Club forecasts that investment fell by 2.6 per cent in 2011 and will grow by just 0.4 per cent in 2012, while unemployment will approach three million, representing 9.3 per cent of the UK’s labour force.

Prof Spencer added: “The only piece of good news for UK households is that inflation should fall back below 2 per cent this year, as commodity prices weaken and the VAT rise drops out of the calculation.”

The forecaster said exports accounted for most of last year’s growth, adding 0.9 percentage points to GDP in 2011, but with weakening demand from the eurozone and concerns over China’s ability to soft-land its economy, the outlook for 2012 looked much less promising.

Meanwhile, Cebr revised down its forecast for growth for 2012 as a whole from 0.7 per cent growth, as predicted last October, to a decline of 0.4 per cent, with a risk of a more serious decline of 1.1 per cent if developments in the eurozone are worse than feared.

Douglas McWilliams, one of the report’s authors and chief executive of Cebr, said: “We take no pleasure in outlining such a bleak forecast. But the world is going through a fundamental change, where previously poor economies are industrialising fast.”

S&P stripped France of its gold-plated AAA credit rating on Friday and also lowered the long-term ratings on Austria, Malta, Slovakia and Slovenia by one notch.

The rating levels for Cyprus, Italy, Portugal and Spain were dropped two notches. There was no change for Belgium, Estonia, Finland, Germany, Ireland, Luxembourg and the Netherlands.

The French president has kept silent about Friday’s downgrade thus far, instead trotting out his finance minister and prime minister to respond to the move that had been widely expected.

While he also avoided any mention of the downgrade in his first public appearance since it was confirmed, Mr Sarkozy delivered a speech to mark the 100th anniversary of the birth of a founding father of the current republic into a kind of campaign rally, while also trying to appear to be above the fray.

“This is a test, and since it is we have to confront it, we have to resist, we have to fight,” Mr Sarkozy told an audience in central France.

“We have to demonstrate courage, we have to demonstrate calm.”

The president said France must show the courage to reform and promised to unveil a set of “important decisions” before the end of the month – without giving any details – to confront the crisis.

Mr Sarkozy’s government was twice forced to make extra budget cuts last year to stay on track, with a promise to balance the budget by 2016.

French finance minister François Baroin promised that, even with the downgrade, no new cuts would be necessary.

Mr Hague said the ratings downgrades did not in themselves bring closer the prospect of the demise of the euro.

But he said: “This is serious.It underlines the fact that the eurozone is not through its problems. We want it to be stable and healthy. That’s in our national interest. But it means that across Europe, including the UK, we need to redouble our efforts to get growth going.”

That meant more free trade agreements with the rest of the world, advances in the European single market and fewer regulations that damaged business, the Foreign Secretary said.

Those were the demands that Prime Minister David Cameron would be taking to the next meeting of the European Council at the end of this month, Mr Hague added.

He also claimed that Labour’s plans to reduce the deficit more slowly would put Britain’s AAA credit rating at risk.

“These events do underline the importance of what we are doing here in the UK,” he said.

Asked about Foreign Office contingency planning to rescue Britons living in Europe in the event of the collapse of the euro, Mr Hague said that did not mean he thought it was going to happen.