QE 'could be back' as officials say recession was worse than thought

The UK's great recession was considerably greater than previously thought and the recovery's momentum is looking weaker, according to official figures released yesterday.

The Office for National Statistics reported that the economy narrowly avoided a double-dip recession last year after statistical revisions, but the more significant revisions related to output in 2009.

In the first quarter of that year the ONS says that the economy contracted by a massive 2.5 per cent, significantly more than its previous estimate of a 1.5 per cent contraction. That means that over the course of the 2008-2009 great recession the economy shrank by 7.2 per cent, rather than 6 per cent as previously thought.

The revisions to the path of output since 2010 were comparatively minor, with the result that the economy is now 3.9 per cent below its peak in the first three months of 2008. Until yesterday the gap had been estimated at 2.6 per cent.

The ONS explained that the hefty revisions were driven by methodological statistics-gathering changes. These included a new and improved way of measuring the growth of real capital investment by firms and updated information on company profits from Her Majesty's Revenue and Customs. The revisions deepen the so-called "productivity puzzle" of rising employment over a period of weak output.

According to the ONS, GDP flatlined in the first quarter of 2012, rather than contracting, meaning that the UK did not register two successive quarters of decline. But the ONS said that it was "clearly absurd" to read much into the disappearance of the double-dip recession, given that it was achieved by an upward revision of GDP growth in the first quarter of 2012 by just 0.1 per cent. "It is clearly absurd to imagine that it is possible to measure the size of the economy to this degree of accuracy," the statistics agency said in an explanatory paper.

City analysts said the revisions showed that the economy was weaker than previously believed and some suggested that they could offer support for the case for more monetary stimulus from the Bank of England. "If one believes this has any bearing on the amount of spare capacity in the economy, then it would seem to give the Bank of England's Monetary Policy Committee more scope to ease policy further," said David Owen of Jefferies.

"It certainly looks as if the UK is a step further away now from 'escape velocity'," said Victoria Clarke of Investec. "We suspect that this, coupled with some inflation projections in August, will be enough to tilt the balance for the Bank to sanction more quantitative easing."

The latest figures also showed that the household savings ratio dipped in the first quarter of the year, casting doubt over the sustainability of the recovery.

The ratio of income saved dipped from 5.9 per cent to 4.2 per cent, while real disposable incomes fell by 1.7 per cent. This implied that households financed their growth in consumption over the quarter by reducing their savings. "People can't compensate for falling incomes by reducing savings forever," said Simon Wells of HSBC. "Unless wage growth picks up, the recovery could fast run out of steam."

The ONS also reported that business investment declined by 1.8 per cent over the first three months of the year. The economy's 0.3 per cent expansion was driven up by household consumption and net trade.

On the output measure of GDP, growth was driven by the services sector. Construction fell by 1.8 per cent and manufacturing by 0.2 per cent.

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