UK economy heading for ‘fragile’ recovery

OFFICIAL FIGURES this week for Britain’s second-quarter gross domestic product will confirm the worst of the recession is over. But a report from the Ernst & Young Item club, using the Treasury’s economic model, will warn of a fragile recovery, with the threat of a “double dip” back into recession.

Second-quarter GDP figures, to be published on Friday, are expected to show the economy shrank only slightly after its record six-monthly fall in the fourth quarter of last year and the first quarter of this year.

Some economists think the figures could even show a small rise but, according to Ideaglobal.com, the consensus among analysts is that there will be a fall of 0.3%, after drops of 1.8% and 2.4% respectively in the two previous quarters. The National Institute of Economic and Social Research, which produces monthly GDP estimates, expects a fall of 0.4%.

Signs that the economy is stabilising after its autumn and winter plunge will be welcomed – largely reflecting the start of a turnround in stocks, or inventories – but economists remain cautious. 

“The economic patient has been in trauma, but thanks to the paramedics at the Treasury and the Bank of England who pumped billions of pounds worth of medicine into the economy, the patient has been stabilised for now,” said Peter Spencer, chief economic adviser at the Ernst & Young Item club. “However, it remains unclear how quick and complete recovery will be and there is still a serious chance of a relapse.”

Item predicts a 4.4% slump in the economy this year, its worst since 1945 and a significantly deeper decline than the Treasury’s 3.5% drop. Next year it predicts a modest recovery, with 0.5% growth, followed by 2% in 2011.

“It is hard to see any very solid grounds for sustained optimism at the moment,” Spencer added. “The only ray of hope is a potential recovery in world markets, which UK exporters can exploit because of the low level of the pound.

“Capital remains short and expensive for the banks and there is little sign of any extra lending to either companies or consumers.”

Consumer spending will drop by 3.2% this year and a further 0.2% in 2010, Item predicts, while investment will drop by 12.9% and 1.9% respectively. Manufacturing will slide by 9.9% this year before a 3.3% recovery in 2010 on the back of stronger exports.

Inflation will not remain a problem for some years, it adds, with the annual average only creeping back up to the Bank of England’s 2% target in 2012. Interest rates will stay below 3% until late 2011, it says, and only rise back to the “normal” level of 5% during 2012.

The forecast is fairly optimistic on unemployment, however, which it expects to peak at 2.76m next year, compared with 2.38m now.

The Item economists believe that the job market’s flexibility, reflected in pay freezes and flexible working, has prevented a bigger shakeout in employment. (David Smith, The Times)  http://business.timesonline.co.uk/tol/business/economics/article6719052.ece

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