British GDP Falls Much Further Than Expected, Recession Continues

England's recession deepened in the second quarter, preliminary data released Wednesday showed. The Office of National Statistics (ONS) in England said that the U.K. economy contracted a staggeringly low rate of 0.8 percent on an annual basis, much worse than the economist expectations of a 0.3 percent drop and below the previous estimate of a 0.2 percent drop in the quarter.

The ONS cited extra holidays and poor weather as reasons for the large miss in GDP, stating that these events caused extra uncertainty. England's economy had already been slowing due to headwinds from continental Europe. As the Eurozone deals with its sovereign debt crisis, it has been launching austerity programs which have cause the economy there to slow. Also, the U.K. has launched its own set of austerity programs, including tax hikes and spending cuts. The combination of domestic austerity and foreign headwinds has caused the U.K. economy to enter a double-dip.

The Bank of England has been fighting the fiscal deleveraging by consistently increasing its quantitative easing program, to some avail. However, the foreign effects have outweighed the Bank's plans. Lending has dried up do to fears that a European collapse is imminent. In response to this drop in lending, the Bank of England has launched a new program where it gives cheaper loans to banks that lend more.

The results of this new program have yet to be seen, however other central banks are already considering such a plan. The Federal Reserve has also been considering such a move also as Operation Twist has seemingly been ineffective and the economy continues to slow. However, there may be one piece of light at the end of the tunnel.

The London Olympics should be a boost for England, as tourism and retail sales should see a nice bounce. Also, production of goods and other services such as restaurants should see a boost as there are more people flooding the streets for a two-week period. Should the boost be high enough, the U.K. economy could at least see a bounce from these low levels and hopefully a return to growth.

A return to growth would be a boost for the British pound. Also, British industrial stocks would rebound and British stocks overall could see a bounce.