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UK Set for Slow Growth but No Recession

The stomach-churning gyrations of stock markets in recent weeks, coupled with some unambiguously weak economic readings, have led several private sector economists to downgrade their growth estimates still further.

Big Ben
Don Klumpp | Iconica | Getty Images
Big Ben

But, despite the widespread gloom, the consensus is that Britain will not re-enter a recession.

“Our base is not a recession, but an extended period of sluggish growth and rising unemployment,” said Michael Saunders, economist at Citigroup, who had begun 2011 with a growth forecast notably stronger than that of many others in the private sector.

Now, Mr Saunders said, the prospect that increased business investment would generate jobs and boost demand – once seen as the most likely scenario – had weakened.

Although British companies have an abundance of cash and are highly profitable, the slide in financial markets, coupled with anxiety over how eurozone governments will manage their collective finances and banking sectors, had jolted confidence badly, he said.

“This will cause firms to postpone expansion and return to cost-cutting mode,” he said.

Citi, which sharply downgraded its 2012 gross domestic product growth forecast, is hardly alone. Economists at JPMorgan noted that “making GDP forecast revisions while markets gyrate may be rather like trying to catch a falling knife.” But that did not stop it downgrading its own growth forecasts for the second half of 2011.

Malcolm Barr, economist at the bank, noted that anyone doubting that both the US and UK economies were weaker than had been believed earlier in the year need only look at the latest employment data. The UK saw the biggest one-month jump in applications for jobless benefits since May 2009 when the economy was stuck in recession and the headline unemployment rate rose to 7.9 percent.

Moreover, the unexpectedly weak growth rate of eurozone GDP for the second quarter of 2011 has significant implications for the UK. As Mr Barr noted, it is Britain’s single biggest trading partner.

That close relationship with continental Europe may well explain the findings of private sector surveys of UK businesses which show that confidence is falling. The ICAEW/Grant Thornton Business Confidence Monitor, to be released on Monday, showed that the Confidence Index fell sharply from 13.7 in the second quarter to 8.1 in the third quarter of this year and is at its lowest level since the third quarter of 2009 when the UK was still in recession.

Scott Barnes, chief executive of Grant Thornton, said the survey results should come as little surprise. “Although businesses are predicting growth in turnover, exports and profits, the fragility of our largest overseas markets is worrying,“ Mr Barnes said.

“The UK economy will however grow this year, albeit weakly, and I believe we will avoid the double-dip recession. That may be little consolation today but we have to look to longer-term recovery rather than quick fixes.”

Moreover, there are indications that the household sector – which accounts for nearly two-thirds of all UK consumption – is also losing confidence. Markit, which compiles monthly surveys of purchasing managers in the services and manufacturing sectors, is to release the results of its Household Finance Index showing that household finances in August deteriorated at the fastest pace in the two and a half years of the survey, falling even more quickly than they did when the recession was at its height in early 2009.

Significantly, the survey recorded the fastest drop in cash available to spend of any month in the survey’s history. Wages rising at an average rate of 2.2 percent annually before the effects of bonuses – and, with the exception of the business and financial services sectors, at rates below 2.0 percent – it is not surprising that households are struggling to keep up with prices now rising at a 4.4 percent year-on-year rate.

One element economists are citing as a potential driver of growth – and one likely to help the UK stay out of recession – is the possibility that the Bank of England will undertake more gilts purchases, a process known as quantitative easing, despite high inflation.

“Overall, a modestly worse than expected July inflation [figure] should not detract from concerns about the softening growth outlook,” said George Buckley, economist at Deutsche Bank. The current high inflation, about which the Bank could do very little, was not the most pressing issue, he added, noting that growth was likely to take precedence.


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