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Bleak Growth Prospects for British Economy

The outlook for Britain's economic growth remains bleak in the near-term, increasing pressure on Westminster and the Bank of England to spur growth well ahead of the 2015 parliamentary elections.

So far, British economy has been struggling with three consecutive quarterly declines and the recovery is expected to be a long and slow process.

Official rough data

The first estimate of the UK GDP provided by the Office for National Statistics in London shows the British economy contracted again in the second quarter of 2012 by 0.7%, following a 0.3% decline in the previous quarter.

Economic slump of 0.7% in the second quarter of 2012 is the third consecutive quarterly decline and the largest quarterly economic contraction since the first quarter of 2009.

In annual terms, gross domestic product in volume terms decreased by 0.8%.

As regards the economic growth outlooks for 2012, they differ only slightly in sentiment and figures. But the overall anticipation is that the economy will either remain flat or decline.

Bank of England forecast

The Bank of England (BoE) offers bleak forecasts in its quarterly Inflation Report published on Wednesday, August 8.

The BoE slashed its medium-term growth outlook from 2.7% estimated in the May Inflation Report down to around 2% judged in its August forecast.

In the near-term, the BoE Monetary Policy Committee (MPC) judges in its August Quarterly Inflation Report that the underlying growth is expected to remain soft throughout this year, floating around zero.

The central bank's monetary policy makers argue that the current headwinds that have been restraining growth at home in the first half of this year should abate as an easing of external price pressure reduces the squeeze on households' real income, and the BoE's recently introduced scheme for cheap lending to the small businesses improves the cost and availability of bank credit.

In order to stimulate the crippling economy, the BoE increased its quantitative easing program in July by an additional amount of £50 billion in government assets purchases to reach a total of £375 billion.

Apart from quantitative easing (QE), the BoE launched the 'funding-for-lending' scheme (FLS) as well as started the Extended Collateral Term Repo (ECTR) Facility. The first tool is to inject money directly to small businesses in the UK, while the latter one is aimed at easing credit strains on British banks.

Overall, the MPC judgement is that the economic growth will gradually recover, but the GDP in the second half of the forecast period (from second half of 2013 until the first half of 2014) is more likely to be below than above its historic average due to the factors contributing to the weakness of growth may persist for longer than previously thought.

NIESR GDP outlook

The National Institute of Economic and Social Research (NIESR), Britain's longest established independent economic research institute,  published a study on August 2 saying the British economy is expected to contract by 0.5% in 2012 with the private sector worsened by a dysfunctional financial market.

NIESR looks even further to 2013, arguing that growth will pick up after weak demand and restrained growth in 2012 and expects output to rise 1.3% in 2013, and continue increasing to 2.4% in 2014, although there are persistent risks stemming from the Eurozone uncertainty.

NIESR adds that the continued weakness of the UK economy reflects both a lack of demand and the supply-side constraint of an unreconstructed banking system.

S&P vs OBR outlook

Rating agency Standard and Poor's (S&P) published its UK GDP outlook on July 28 confirming Britain's top AAA credit rating, but warned that the official statistics on growth issued by the Office for Budgetary Responsibility (OBR), the agency providing independent economic forecasts as background to the preparation of the UK budget, are too optimistic.

OBR forecasts growth of 0.8% in 2012 as opposed to a 0.5% decline anticipated by NIESR. OBR then estimates the economy to move upwards by 2.0% in 2013 (revised down from 2.1% in November), picking up to 2.7% in 2014 and 3.0% in the final two years of the forecast.

S&P rating agency expects the British economy to pick up in the second half of this year, despite a slip into recession earlier in 2012.

Standard & Poor's forecasts growth at 0.5% in 2012. This is a less optimistic view than the one offered by OBR, but more optimistic view than the one offered by the BoE, which anticipates the economy to remain flat overall in 2012, and the anticipation by NIESR saying economy will shrink 0.5% this year.

Commercial forecast

Britain's economy should strengthen in the months ahead after a dismal start to the year, Ernst & Young wrote in its quarterly report, estimating that the UK economy will grow 1.6% in 2013 and 2.6% in 2014.

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As far as the external price shocks remaining subdued in the near-term, inflation is expected to ease to 1.7% by the end of the year. Currently, the consumer price index stands at 2.8%.

However, the forecast warns that even though household spending improves in the second half of the year, this will be enough only to enable the UK's GDP to remain flat this year.

The forecast argues that sustainable economic growth in Britain is strongly dependent on an improvement in exports as well as business investments.

Outlook for inflation

Consumer price inflation stood at 2.4% in June, down from 3.5% in March and 5.2% in September 2011, when the consumer price index hit the record high.

The Bank of England's (BoE) near-term inflation outlook lies below the one from the last Inflation Report from May.

The BoE's monetary policy makers revised the inflation outlook downwards reflecting lower energy prices as well as broader-based weakness in price pressure.

Inflation is expected to fall further down towards the end of the year to be around or even below the 2% target.

In the longer-term, inflationary upward pressures are expected to be mitigated by lower commodity prices slowing down inflation to around 2% in 2013.

By. Vladimir Harman, WBP Online Correspondent in London


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Leave a comment
  • Philip Andrews on August 10 2012 said:
    It would be nice and helpful to have a summary and/or explanation of this jargon in plain English. For those of us who are not economists and fuinancial wizards...

    Thank you Mr Harman
  • Peter Jones on October 11 2012 said:
    It looks as though the UK will recover sharply in 2014 - a kind of forceful reaction to the slump we are in now. If there is a much higher rate of growth then - it ought to create a lot more demand and hopefully lots of new work as well.
    It may be the case that the Governement has to get more roads, houses and transport infrastructures going to move things along but it will as the election approaches. It would be better for growth in Europe if the left wing coalition came to power in Germany in 2013 and were rather more flexible on financial restraint across the Eurozone.
    We'll all know soon enough !

Leave a comment




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