Is Britain Staring Down Barrel of a Triple-Dip Recession?

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Britons' spirits may be lifted as they deck the halls with boughs of holly in the annual hectic rush ahead of Christmas, but the festive cheer may turn frosty with the prospect of a triple-dip recession looming like a snow cloud over the economy.

A raft of disappointing data from across the UK economy, a longer and deeper period of government austerity than had originally been planned, and a worsening outlook with the global downturn still dragging on output, all suggest that the country may slump to yet another contraction before a recovery begins.

"There is a risk of triple-dip recession, but we do think that UK growth will slowly recover throughout 2013, so another contraction should be avoided in Q1, though don't expect any fireworks," said Richard Driver, currency analyst at Caxton FX, adding that a fourth quarter contraction is "looking likely" but it could be as little as -0.1 percent.

Technically, the definition of a recession is two consecutive quarters of declining GDP. However, many will regard an unprecedented third drop in output from the UK economy, even if only for one quarter, as a bona fide recession because it is unusual.

The country emerged from its three quarters of double-dip recession, the longest since the Second World War, in the third quarter after a positive base effect in the data, with anomalous lost output from an extra public holiday for the Queen's Diamond Jubilee, and the London 2012 Olympic Games boosting the GDP number to 1 percent growth.

Official data from the Office for National Statistics (ONS) showed that in October, the first month of the last quarter, construction sector output collapsed by 5.7 percent when compared with the year before.

This is significant because it was a sharp drop in construction sector output that catalysed the double-dip recession which started in the final three months of 2011, and shows how much further the industry has fallen since.

It is not just the construction sector that has had a shaky start to the fourth quarter. Industrial production dived 3 percent year-on-year in October, reported the ONS.

Indexes compiled from monthly surveys of purchasing managers working in private industry across the service, manufacturing and construction sectors have also shown concerning readings in the final months of the year.

In the country's vast service sector, which represents around three quarters of the economy, its November purchasing managers index (PMI) reading plunged to its lowest since December 2010, as growth slowed to near neutral.

Confidence among service firms slumped to its lowest level in 11 months.

The November construction PMI sunk back into a negative reading with the sharpest decline in new business orders since April 2009, compounding the troubling picture painted by official figures.

Manufacturing PMI continued to contract in November, though this decline actually eased across the month. However it is still an industry which is providing no economic growth, according to the surveys.

Retail sales, according to the British Retail Consortium, grew at a slower pace than expected in November, rising by just 0.4 percent at a time when shoppers are usually starting their trawl for Christmas presents.

"The decline of the services PMI in recent months is particularly worrying and points towards a weakening in the final quarter of the year," Scott Corfe, senior economist at the Centre for Economic and Business Research (CEBR), said to IBTimes UK.

"And construction output data remain incredibly poor - which could pull down the overall UK economy.

"However, we expect growth of 0.2 percent in Q1 2013 so the UK should just about avoid a triple-dip. Nevertheless, growth is expected to be very weak next year, at 0.9% for 2013 as a whole."

Policy pushes felt in 2013

Recent announcements by the government, such as reforms to the planning laws and rail investment, will only start having an impact in 2013.

Likewise the UK Guarantees Scheme, the Treasury's flagship policy on infrastructure which offers taxpayer money to underpin the finances of major shovel-ready projects, will only start to see an impact next year as more applicants are approved.

The Bank of England's big credit easing effort, the Funding for Lending Scheme, also appears to be a slow starter.

Under the shceme, banks can apply for cheap loans from the Bank of England in line with the value of their affordable lending to the real economy of consumers and small businesses.

So far just six financial institutions have drawn down £4.4bn in discounted loans, with only £500m finding its way into the economy through extra lending.

Autumn statement and UK's threatened AAA credit rating

Chancellor George Osborne played the part of the Charles Dickens' miserly character Ebeneezer Scrooge when he delivered his autumn statement in the run up to Christmas.

Osborne announced more real terms welfare cuts and said austerity would last three years longer than had originally been forecast, taking the spending cuts programme until 2018.

He also admitted that he would miss his fiscal target of bringing debt down as a percentage of GDP by 2015/16 by a year.

This subsequently caused the credit rating agencies to cast doubt over the safety of Britain's AAA status, something Osborne had once said would be "humiliating" to lose.

Osborne has since backtracked, saying this "ultimate test" of his fiscal policy is borrowing costs when the government goes fishing for cash in the bond market.

Fitch said missing the target brings the government's fiscal credibility into question, while S&P became the third of the three main rating agencies to put the UK's AAA status on negative outlook.

"If we do see a triple-dip then you are bound to see the UK lose its AAA credit rating, if this hasn't already happened early next year," said Caxton FX's Driver.

"It is possible that the market will tolerate the loss of the AAA rating but the chances are that sterling will come under some pressure, against the US dollar particularly.

"Broadly speaking, we hold a positive outlook for the GBP against the EUR in 2013, while predicting a fairly steady fall against the USD."

With a worsening outlook and slashed growth forecasts for the British economy from the likes of the Office for Budget Responsibility (OBR), the Bank of England, and the International Monetary Fund (IMF), and a series of disappointing data releases, it looks like a triple-dip recession is a real possibility, even if it is not a dead cert.
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