Fresh data fails to provide any cheer on UK growth

Q1 GDP growth is confirmed at a measly 0.5%. Still, at least Mervyn King says we have a contingency plan for a Greek default (although he didn't say what).

by James Taylor
Last Updated: 19 Aug 2013

The Office for National Statistics published its latest round of Q1 GDP data today, and unfortunately there was no sign of an upward revision: it still thinks that the UK economy grew a measly 0.5% in the first three months of this year. Given how fragile the economy clearly is at the moment, it's no wonder that the ever-increasing threat of a Greek default is still a major cause for anxiety, even outside the Eurozone. Governor Mervyn King told a Parliamentary Committee today that the Bank of England has a contingency plan in place - but since he didn't say what that plan was, and since he admits that nobody really knows the true extent of the problem, that's not terribly reassuring...

The latest ONS data did suggest that the construction industry's slump wasn't quite as bad as previously thought - it's now estimated to have been -3.4%, rather than -4%. But that was more or less the only bit of good news; this improvement was offset by a downward revision to manufacturing output, which contrary to previous predictions of 0.2% growth is now thought to have shrunk by 0.1%. And the ONS also confirmed that household spending dropped by 0.6% during the quarter - the biggest fall since 2009, when the recession was at its height. Expect the Government to come under more pressure to try and stimulate spending (not least from our beleaguered high street).

Meanwhile the ongoing saga in Greece continues to provide Whitehall with another major headache. The latest proposed austerity package is being debated in the Greek parliament today, with EU lawmakers warning that there's no other option if the country wants to avoid default. But popular opinion is still firmly against the idea: a two-day general strike starts today, while thousands of people have again taken to the streets in protest this morning.

One possible solution - at least in the short term - comes from France, which has come up with a plan that involves Greece's creditors rolling over some of the country's debt. It's a complicated proposal, but basically bondholders would pocket 30% of what they're owed, re-lend 50% for 30 years, and put the other 20% in a special purpose vehicle to invest in high-quality assets.

However, it's proving controversial, since it will still involve some kind of state support or guarantees. And perhaps more significantly, it still requires Greece to pay off its €340bn debt in full at some point - which some think is impossible. Speaking to the Treasury Select Committee today, Mervyn King pointed out that a bailout wouldn't solve Greece's problems, merely postpone them - since the problem was solvency, not liquidity. Unless Greece starts exporting more and importing less, he says, the underlying issue won't go away.

Either way, he's clearly not too optimistic: the Bank reckons markets now put the risk of a default at 80%. While he claims to have a contingency plan, he also called for the banks to be more transparent about their exposure to the country, indirect or otherwise. Surely until this becomes more evident, it's a bit hard to make any contingency plan worthy of the name...

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