Shops and factories struggle in biting recession

LONDON Tue Aug 7, 2012 3:09pm EDT

1 of 2. Customers shop for groceries in a supermarket in London October 18, 2011.

Credit: Reuters/Neil Hall

LONDON (Reuters) - Britain's economy is stuck in its bid to beat recession, with data on Tuesday showing retail sales growth slowed in July and manufacturing tumbling in June - presaging another cut to the central bank's growth forecast.

Bank of England governor Mervyn King looks set to give one of his notoriously gloomy outlooks for Britain, which is in recession as the euro zone debt crisis, government spending cuts, bad weather and one-off factors are hurting the economy.

Manufacturing output shrank by 2.9 percent in June, sapped by extra public holidays to celebrate Queen Elizabeth's 60 years on the throne, though the drop was smaller than first estimated.

And retail sales growth slowed in July as record-breaking rain depressed sales of summer clothes and other seasonal products.

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"The big picture is that the UK is in a severe double-dip recession and, with inflation also falling faster than expected, Governor Mervyn King will almost certainly paint a very cautious picture tomorrow," UBS economist Amit Kara said.

The central bank is expected to pave the way for more stimulus with a set of downbeat forecasts in its quarterly inflation report on Wednesday, after it started pumping an additional 50 billion pounds into the economy in July.

The Office for National Statistics said the wider reading of industrial output, which includes energy production and mining, dropped 2.5 percent in June, after a 1.0 percent rise in May.

The quarterly fall in industrial output in the second quarter was revised to 0.9 percent from the originally estimated 1.3 percent drop, indicating that the decline in GDP was a notch smaller than reported two weeks ago.

But the 0.7 percent contraction of the economy between April and June had been much sharper than expected, as a steep slump in construction compounded the weakness in other sectors.

The Organisation for Economic Cooperation and Development (OECD) as well as a growing number of City economists are now predicting that the economy will shrink in the full year.

THRIFTY SHOPPERS

Britain fell back into a second recession around the turn of the year, and weakening business surveys show that a vigorous return to growth over the summer looks unlikely.

Consumers are still reluctant to spend more after rising prices and higher taxes have squeezed their budgets, and firms are holding back investment as the euro zone debt crisis is weighing on export prospects and confidence.

Wary consumers did not make for profligate shoppers last month, with the British Retail Consortium saying that like-for-like retail sales -- at stores open for at least a year -- rose by just 0.1 percent compared with July 2011.

The value of total retail sales, a measure favoured by economists and closer to that found in official statistics, was 2.0 percent up on the year, after a 3.5 percent climb in June.

"July was clearly not a golden month for retail," said BRC Director General Stephen Robertson. "After the June wash-out, more wet weather in July continued to stifle demand for outdoor gear," he added.

The weak economy is keeping the pressure on the government to loosen its tough austerity programme, aimed at erasing a huge budget deficit within five years, in order to boost growth.

However, it has stuck to its guns on deficit-reduction, leaving the task of supporting growth to the Bank.

(Additional reporting by David Milliken; editing by Ron Askew)