UK economy to see sharper slowdown in 2011

Author: 
REUTERS
Publication Date: 
Thu, 2010-12-23 01:25

The Office for National Statistics revised down third quarter growth to 0.7 percent from 0.8 percent and said growth in the first two quarters of the year was also slightly weaker than previously reported.
Hopes of a long-awaited rebalancing of Britain's economy were also dashed. The revised figures showed net trade was a drag on growth in the third quarter, rather than contributing to the recovery as previously assumed.
"The raft of UK data do little to improve the prospects for the economy next year," said Vicky Redwood at Capital Economics. "A continued strong recovery seems far from assured."
The government, accused by the opposition of risking the recovery with cuts that are too deep and too fast, insisted a "gradual but sustained" private sector-led recovery remained on track. But business groups warned against withdrawing support from the economy too swiftly.
"Since we have not yet seen the impact of the increase in VAT and the large spending cuts set to take effect in 2011, it is critical to take measures that ensure the recovery continues," said David Kern, chief economist at the British Chambers of Commerce.
Britain's coalition government aims to cut spending by 81 billion pounds and raise taxes by 29 billion pounds by 2014/15 to close a budget deficit that has risen to a record peacetime high.
It is hoping the fiscal squeeze may be softened by loose monetary policy, but surprisingly stubborn inflation may leave the Bank of England little scope for maneuver.
Minutes to the central bank's latest policy meeting showed the Monetary Policy Committee retained its three-way split this month, but more members are becoming worried about medium-term inflation risks.
Inflation in Britain rose to a six-month high of 3.3 percent last month and is expected to remain well above the BoE's 2 percent target for at least another year.
Money markets, which as recently as October were pricing in a more than 50 percent chance of another wave of quantitative easing, are warming to the view that the BoE's next move will be to tighten policy — probably toward the end of next year.
The combination of stubborn inflation and slowing growth bodes poorly for the government which is already fighting to preserve coalition unity.
A desire to bring forward big-ticket purchases ahead of January's rise in VAT sales tax will support fourth-quarter GDP growth, but the start of 2011 will be the big challenge.
Growth in the construction sector, a key driver of the recovery between April and September, has already started to slow.
A breakdown of Wednesday's figures showed government spending fell by 0.4 percent between July and September. That was the biggest quarterly fall since the start of 2009 and was before the bulk of the government's austerity measures kick in.
Evidence that Britons are already bracing themselves for tough times came from a rise in the household saving ratio, to 5.0 percent from 3.5 percent in the second quarter.
Downward revisions to prior data meant second quarter growth was shaved to 1.1 percent from 1.2 percent and first quarter growth was revised down to 0.3 percent from 0.4 percent.
George Buckley, UK economist at Deutsche Bank, noted there were some optimistic signs in Wednesday's GDP release — real incomes had bounced back, corporate profits were decent, and growth for most of the year, even with the downward revisions, was higher than analysts would have guessed at the start of the year.
However, he noted the disappointing contribution from exports.
Balance of payments data showed Britain's deficit with the rest of the world widened to 9.568 billion pounds in the third quarter from 5.22 billion in the second.

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