UK economy contracts for the first time in a year

<p>The UK suffered its first contraction in GDP for a year in the last quarter of 2011, with GDP falling slightly more than expected, by […]</p>

The UK suffered its first contraction in GDP for a year in the last quarter of 2011, with GDP falling slightly more than expected, by 0.2% against most expectations for a fall of 0.1%.

The fall in GDP had been long expected given the headwinds facing the services sector and the breakdown of activity in the Eurozone, a large UK trading partner. As such, the contraction in Q4 was inevitable.

At the very least, the negative GDP reading will keep the pressure on both the Coalition government and the Bank of England to re-ignite the faltering UK economy through additional stimulus measures, though with such a heavy reliance on Europe as a large UK trading partner, the UK’s economic fate lies in the hands of Brussels as much as London.

However, should todays GDP reading escalate fears significantly of a marked period of negative quarterly UK GDP? Perhaps not. The real concern for now remains the prospect of aneamic UK growth in the medium term than of a prolonged period of negative quarterly GDP.

More QE on the way appears likely That said, today’s GDP data release from the Office of National Statistics, alongside minutes from the latest MPC meeting at the Bank of England strongly suggests that the UK’s Central Bank will now inject more firepower to help the UK stave off a prolonged period of negative GDP through more quantitative easing.

There is every chance that next month, when the UK Central Bank will digest the latest quarterly inflation report, could announce an additional £75bn worth of asset purchases to reignite the UK economy and data from today’s GDP or MPC minutes appears to emphasise this fact.

We saw stocks fall off in reaction to the worse than expected GDP reading, with the FTSE 100 trading down by 20 points on the day, whilst the pound sterling was broadly unchanged. The lack of significant market reaction is likely to be down to the fact that today’s data will have been of no real surprise to most investors.

Join our live webinars for the latest analysis and trading ideas. Register now

GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.