October 11, 2011 / 12:15 PM / 6 years ago

UPDATE 1-UK recession fears grow as output weakens

5 Min Read

LONDON, Oct 11 (Reuters) - Britain's economy risks slipping back into recession after barely growing in the third quarter, a business group said on Tuesday, as data showed that manufacturers are running out of steam.

The British Chambers of Commerce (BCC), which represents companies employing one in six UK workers, said the Bank of England's latest asset purchase programme may not be enough to avert a double-dip recession.

The business group estimated that the economy grew by between 0.1 percent and 0.3 percent in the third quarter and warned that the downside risks were growing due to the euro zone debt crisis and worries about global demand.

"We can avoid a recession, but this relies on the government making some tough policy choices," said BCC Director General John Longworth. "The survey shows the real risks facing the economy and the need for the government to act now."

The BCC said Britain's Conservative-led coalition government was right to stick to its austerity plan to cut a bloated budget deficit, but it must also take "radical" steps to stimulate growth through business-friendly policies.

Despite record low interest rates of 0.5 percent, Britain's economy has stagnated for nearly a year. Inflation of nearly 5 percent is squeezing people's living standards as wages rise slowly and unemployment has started to increase again.

"We're facing one of the toughest trading conditions this country has seen for decades," Phil Clarke, head of the country's biggest retailer Tesco said on Tuesday.

The government is cutting public spending to erase a budget deficit that peaked at nearly 11 percent of output and has little scope for tax cuts or extra spending to boost growth.

The Institute for Fiscal Studies said on Tuesday that the median income in Britain is expected to fall by 7 percent in real terms between 2010 and 2013, the largest three-year drop for 35 years.

That would push an extra 600,000 children and 800,000 adults into poverty, the thinktank said in a report.

'Growing Sense of Gloom'

The opposition Labour Party accuses the coalition of choking growth by doggedly sticking to its original austerity drive. There are question marks over how effective the central bank will be with its second round of quantitative easing to pump money into the economy.

"The latest numbers add to a growing sense of gloom about the health of the UK economy in the third quarter," said Chris Williamson, chief economist at Markit. "There is a substantial risk that the economy could fall back into contraction in the fourth quarter."

The results from the BCC survey of more than 6,000 companies mean the BCC is likely to revise down its growth forecasts for 2011 and 2012, the group's Chief Economist David Kern said.

"In September, my forecast was for 1.1 percent year-on-year (growth) for 2011. On the basis of what I know now, the figure would be 0.9 percent," Kern said.

The survey breakdown laid bare the risks facing the UK economy.

The third quarter domestic manufacturing balance fell to +3 percent from +18 percent in the second quarter, the worst level since the start of 2010. The balance for forward-looking home manufacturing orders fell 13 points to -4 percent, the lowest level since the fourth quarter of 2009.

In the services sector, the domestic sales balance fell to 0 percent in the third quarter, from +10 percent in the previous quarter, the worst level since the end of 2009.

Separate official figures showed British manufacturing output grew at its slowest pace for 18 months in the year to August, dampening government hopes that exports will help to kickstart the faltering economy.

A big monthly rise in output from the volatile oil and gas sector lifted the broader industrial output measure, though it did little to change the overall downward trend.

There was also a surprise pick-up in retail sales in September, according to a survey by the British Retail Consortium (BRC). The trade body said like-for-like retail sales values were 0.3 percent higher compared to September 2010, beating forecasts for a 1 percent fall.

However, BRC Director General Stephen Robertson said that spending growth was below inflation, meaning customers are buying less than this time last year. "Underlying conditions remained weak," he added.

Economists said the official data and surveys pointed to a gloomy outlook, with consumer spending held back by squeezed household finances and exporters facing strong headwinds.

"All in all, it seems increasingly likely that the manufacturing and consumer sectors of the economy contracted in the third quarter," said Samuel Tombs, of Capital Economics.

"As a result, the risks of a renewed recession in the wider economy still appear to be growing."

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