British Economy Suffers Worse Drop in 50 Years

source: New York Times

The British economy contracted in the first quarter by the most in more than 50 years, official figures showed Tuesday, while data from Brussels showed prices falling for the first time ever in the euro zone.

Gross domestic product fell 2.4 percent in the first quarter from the fourth quarter of 2008, the Office for National Statistics said, the most since 1958 and below the initial estimate of a 1.9 percent decline. From a year earlier, the economy contracted 4.9 percent, the largest annual decline ever.

Michael Saunders, an economist at Citigroup in London, said the second quarter, ending Tuesday, would also likely show a contraction, though not as bad as the first quarter. The recession should be nearing its end soon, he added.

Nonetheless, he said, “I don’t think recovery will be strong in U.K., and the U.K. will have problems earlier than other countries.”

In Brussels, meanwhile, the European statistics agency, Eurostat, said its initial reading showed that prices in the euro zone fell 0.1 percent in June from a year earlier. Prices in May were unchanged from a year earlier.

Daniele Antonucci, who covers Europe at Capital Economics in London, wrote in a research note that while commodity price developments could alter the inflation outlook, “there are plenty of reasons” to believe that the annual decline marked the beginning of a downward trend.

“At this stage, we expect negative inflation rates for the next six months or so,” Mr. Antonucci wrote. “With factory gate prices falling, wage growth likely to slow sharply and a big amount of spare capacity in the economy, core inflation will decelerate considerably.” He also warned that the euro zone, “with a more timid policy response than elsewhere,” runs a risk of “a more prolonged and damaging period of deflation.”

Oil prices, though, are currently working against that possibility. Nymex oil futures for August delivery were trading Tuesday morning at $72.03 a barrel, giving them a gain for the year of more than 44 percent for the year.