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By Bradley Gerrard | Published Jul 25, 2012

Schroders warns UK ‘triple dip’ recession on the cards

Schroders has warned that the UK economy will return to recession in 2013, after the Olympic Games generate a brief return to growth this year.

Azad Zangana, European economist at the group, said while he expected the UK economy to return to growth in the third quarter - thanks in part to the “additional boost” from London hosting the Olympics - the bleak picture would return next year.

This will extend the current double-dip recession, which was further confirmed by this morning’s offical estimate of a 0.7 per cent contraction in the second quarter, into a ‘triple dip’ recession scenario.

“The Olympics have helped lift employment through temporary jobs created for the games, but also additional working hours being made available in the retail sector thanks to the relaxation of Sunday trading laws,” he said.

“The extra demand from tourists visiting for the games should slightly offset the cost of the disruption to the local economy, but one of the big factors boosting gross domestic product (GDP) in Q3 will be the inclusion of money spent on tickets for the first time.

“Nevertheless, the data is clearly showing more underlying weakness than we expected, especially in the service sector of the economy.

“We continue to forecast the economy to return to positive growth in the second half of the year, though we also forecast a return to recession in 2013, partly caused by the eurozone debt crisis, but also partly caused by a lack of effective policy left available to the Bank of England.”

Brian Dennehy, managing director of FundExpert.co.uk, said the contraction in economic growth was so severe in the second quarter that the Olympics would “definitely not be enough to get the UK out of recession”.

He said the Sydney Olympics boosted growth in Australia by 0.75 per cent in 2000.

“However, the UK’s economy is almost twice the size of Australia’s - which means almost twice the size relative to the economic importance of the Olympics,” Mr Dennehy said.

“Using this simple rule of thumb, the boost to UK GDP would be more like 0.4 percentage points - not enough to overcome a contraction on a 0.7 per cent level.”

He added the Bank of England is predicting the Olympics will give a 0.2 percentage point boost to GDP, which is “definitely not enough to offset a 0.7 per cent contraction”.

Mr Zangana added that as a result of the latest GDP figures, Schroders had cut its annual 2012 GDP forecast from -0.1 per cent to a “very weak” -0.5 per cent.

“We have also cut our 2013 forecast from 0.7 per cent to 0.5 per cent growth, which is significantly lower than the latest consensus of 1.6 per cent,” he added.

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