An exchange traded fund indexed to the United Kingdom was in the green Wednesday, shaking off economic fears over Britain following reports the economy has fallen into another recession.
After spending cuts, Britain slid into its first double-dip recession since the 1970s, Bloomberg reports.
Economic forecasts were derailed after the Office for National Statistics revealed that Britain’s GDP declined 0.2% in the first quarter following the 0.3% drop in the fourth quarter last year, report David Milliken and Fiona Shaikh for Reuters. Observers largely expected a small expansion at the start of the year.
The construction sector, which witnessed output drop 3% – a three year low, along with a slowdown in financial services and oil and gas extraction are weighing down the economy.
The British government is currently considering an end to its quantitative easing measures to rein in the budget deficit that is over 8% of GDP, but the current weakness, coupled with the recession in the Eurozone, has put the government in a tough spot. [Political and Growth Uncertainty Weigh on Stock ETFs]
“This could be something of a game changer for monetary policy,” Investec economist Philip Shaw said in the Reuters article. “With the weakness in the economy pervasive … there is a genuine debate to be had over whether it is wise to suspend QE.”
“This isn’t supportive of the fiscal consolidation program, so the government is likely to be concerned about that,” Philip Rush, an economist at Nomura International, said in a Bloomberg article. “The data were bad, and that supports the view that the Bank of England will do a final 25 billion pounds of quantitative easing in May.”
The British economy dropped 7.1% during the financial downturn and recovered less than half of the lost growth due to the Eurozone crisis, austerity measures, high inflation and weak financial sector.
Britain’s Office for Budget Responsibility estimates growth of 0.8% this year. The Bank of England expects another contraction in the second quarter and may not provide further monetary stimulus if inflation remains above target.
iShares MSCI United Kingdom Fund (NYSEArca: EWU)
For more information on the U.K., visit our United Kingdom category.
Max Chen contributed to this article.