Will 2013 Be the UK's 'Groundhog Year'?
Staff Writer, CNBC.com
This year risks being a "groundhog year" for the U.K.'s embattled economy as it threatens to repeat much of 2012's gloom, according to an influential think tank.
"It seems that time has stood still for the last twelve months and the same conclusion still holds," according to Tony Dolphin, chief economist of the Institute for Public Policy Research (IPPR). "Policymakers appear to have little idea how to boost growth in the economy and are left hoping that the news will get better. The risk is that 2013 could be groundhog year for the UK economy."
The U.K. is expected to show slow or stagnant growth next year according to most economists, and is facing the loss of its coveted triple-A credit rating. In 2012, the economy fell back into a mini recession for two quarters, and predictions for the final three months of the year are gloomy.
(Read More: UK May Be OK to Lose AAA After All)
There are high hopes that new Governor of the Bank of England Mark Carney will make substantial changes to monetary policy that could kick-start growth – but Carney does not start until the middle of the year and monetary policy changes rarely have an instantaneous effect.
"The biggest problem facing the U.K. economy is a shortage of aggregate demand," according to Dolphin.
"Consumer spending is increasing at a sub-par rate because wages are growing less rapidly than prices and households are choosing to reduce their debts. Export growth has tailed off badly because the U.K.'s main market – Europe – is back in recession. The government is cutting its spending on goods and services. And businesses, although in aggregate they are sitting on large cash piles, are reluctant to spend until they see more demand for their products."
While plenty of money was pumped into the U.K.'s financial system via asset purchases by the Bank of England during 2012, this has not had the desired stimulus for the real economy. Some are worried that too many businesses, which should be allowed to go bust are being kept alive by low interest rates, and that the debt piles of these businesses are in fact growing.
(Read More: Is It Time to Kill Off UK's Zombie Companies?)
Capital Economics also expects the "stagnation" to continue in 2013.
"Over the past five years, the U.K. has already been through the three Rs – recession, recovery and relapse. Unfortunately, the fourth – revival – is not in sight yet," its economists wrote in a research note.
The firm cut its forecast for growth for the full year to 0.2 percent from 0.5 percent earlier in December.
(Read More: No Happy New Year for UK as Gloom Worsens)