April 25, 2013

Britain hopes it's not in third recession

Officials fear yet another economic contraction would bring bad publicity and scare off consumers.

The Associated Press

LONDON - "Recession" may just be a word. But in Britain it may become a habit -- and a dangerous one at that.

It's possible that official figures on first-quarter economic growth, to be released Thursday, could show the country is back in recession, and tension is building.

Although economists on average expect growth of 0.1 percent for the quarter, they warn it would take the smallest statistical variation to put the figure in negative territory. That would place the country in recession, typically defined as two consecutive quarters of economic contraction.

Another recession -- the third since the 2008 financial crisis -- is already being referred to with foreboding in the media as a "Triple Dip." Experts warn that its confirmation would create a wave of negative media attention that would scare consumers away from spending, feeding into a vicious cycle that has the economy flat-lining.

"It's psychological -- this is all psychological," said Cary Cooper, a professor at Lancaster University Management School. "It's about the message that those figures send to consumers and small businesses."

The government desperately wants a strong number to justify its increasingly criticized policy of painful spending cuts. But recent indicators on Britain's economy have been disappointing. Inflation is rising faster than wages, cutting into people's standard of living. Unemployment is up at 7.9 percent. Two international ratings agencies have downgraded the country's credit grade from the top level AAA, warning about the government's fiscal policies.

The government, which has long played on its AAA rating as a sign of its economic might, has been pursuing a harsh program of spending cuts and tax increases to reduce the budget deficit, which at 7.4 percent of annual economic output is more than twice the EU's 3 percent limit.

Like many governments in Europe that have been scarred by the bond market turmoil that forced Greece and four other countries to need rescue loans, Britain is focusing on reducing debt quickly, even at the cost of short-term economic pain.

What some governments and economists are slowly realizing, however, is that they may have underestimated the damage such austerity would do.

There's long been pressure domestically in Britain to ease off the budget cuts, but in the past few days the International Monetary Fund also chimed in. The fund, whose views carry weight because it is involved in all of Europe's sovereign bailout programs, has pressured Treasury chief George Osborne to slow down the austerity measures in hopes of reviving the economy.

 

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