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Economy in Brief

UK GDP Surprises with 0.8% Fall in Q2
by Carol Stone July 24, 2009

UK forecasters were looking for Q2 GDP to be down 0.3% from Q1, so they were surprised today at the -0.8% preliminary estimate published by ONS. Press reports emphasize the magnitude of the overall decline, 5.6% year-on-year, and 5.7% from the peak in Q1 2008. The year-on-year figure is the weakest of comparable GDP performances in the 54-year history of these quarterly series, and the peak-to-latest is perhaps tied with the 1979-81 recession as the largest total contraction in any recession.

Forecasters apparently put the most store in the manufacturing sector, which is doing better. Output there is reported down just 0.3% in the quarter, a marked improvement from the 5.5% during Q1. Within the monthly data, March was actually higher by 0.2% and April held steady with that before a renewed decline in May, 0.5%, also reported this morning. But that most cyclical sector seems to be on the verge of turning around.

However, some service industries and construction remain feeble, even though they declined less that in prior recent periods. Construction had been down 5.0% and 6.9% in Q4 and Q1, respectively, so in one sense 2.2% in Q2 is "better". In an absolute sense, though, that's still quite weak. Similarly, services contracted 0.6%, somewhat less than 1.6% in Q1 and 1.0% in Q4. [All these growth rates are period-to-period, not annualized].

Within services, business services and finance apparently had the largest negative contribution, as they contracted 0.7%, with a weight of more than 30% in the total. The biggest single decline in a sector was 2.1% in transport, storage and communication, where activity fell 2.1% in Q2, but the industry group has only a 7% weight.

In such a severe recession as there's been, it might not be surprising that weakness has spilled more into services than we're used to. Further, the recession's origin in the over-extended financial sector suggests that it might well stay down longer than has been customary.

All this said, the 0.8% decrease in Q2 GDP is still much better than the prior two periods, and while the recession continues, the stabilization of manufacturing may well be a sign that recovery is developing.

% Changes (not annualized), SA 2005 Weight Q2 2009 Q1 2009 Q4 2008 2008 2007

GDP 1000 -0.8 -5.6 -2.4 -4.9 -1.8 -1.8 0.7 2.6
Manufacturing 133 -0.3 -12.6 -5.5 -13.8 -5.2 -8.2 -2.8 0.6
Construction 63 -2.2 -14.7 -6.9 -13.2 -5.0 -5.3 0.2 2.7
Services 759 -0.6 -3.8 -1.6 -3.1 -1.0 -0.7 1.3 3.5
Business & Finance 304 -0.7 -4.4 -2.5 -3.4 -0.6 0.3 2.4 5.5
Transport, Storage &  Communication 72 -2.1 -7.0 -3.0 -4.5 -1.4 0.5 2.0 3.5
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