'Recession is over' but UK growth weak

Published on Saturday 17 October 2009 13:49

THE recession is over in the UK, but a sustained recovery relies on a pick-up in world trade because consumer debt is hampering domestic demand, say a group of influential economists.

The Ernst & Young (E&Y) Item Club, the only forecasting group to use the Treasury's model of the UK economy, will tomorrow release its autumn report, which will declare that the country is "back from the brink" as confidence in equity markets rebounds.

However, GDP in the UK will struggle to hit 1 per cent growth next year and E&Y will say that "despite growing optimism it is still premature to call it the beginnings of a recovery".

And Dougie Adams, senior economic adviser to the E&Y Scottish Item Club, warns that Scotland faces lagging behind the rest of the UK.

"Global market forces will have a big part to play in Scotland's return to economic growth as it will do in the rest of the UK. However, for an enduring recovery, Scotland faces a major challenge of shifting gears to an export and investment-led economy – a process that certainly won't take place overnight."

He says Scotland is less export-orientated than other parts of the UK, so the "healing process" will be slow. He warns of a danger of a reversal of the trend of lower unemployment in Scotland and migration from the country could become an issue.

On a positive note, the Item Club has identified a revival of the UK mergers and acquisitions market. This finding is supported by a study by accountancy firm KPMG for Scotland on Sunday into the number of deals being completed north of the border in recent months.

KPMG found signs of life in the Scottish deals market following the rise in the FTSE and the number of companies falling into administration. The number of deals completed between April and June this year rose to 53 from just 40 in the first three months of 2009.

Although the total number of deals which completed in the first half of 2009 fell by 11 per cent compared with the second half of 2008, the rate of decline has slowed considerably following the 29 per cent drop from the first half of last year.

Craig Anderson, senior partner for KPMG in Scotland, said: "Although we are nowhere near the levels of activity from the first half of 2008 and certainly not to the high points of 2006, the rate of decline has bottomed out at least and there are encouraging signs for the rest of this year. If the growth and relative high value of the FTSE can be sustained, we would expect activity to grow further."

The number of "distressed" deals – acquisitions taking place as a result of companies falling into administration – has increased since the second half of 2008.

As more companies renege on banking agreements, KPMG believes this trend will continue to hit a high point at the start of 2010. However, Anderson warned: "It seems likely that the availability and cost of banking will remain as a constraining factor in the Scottish deals market."

Despite an increase in deal activity, E&Y says there are still clouds on the horizon. In the report, Professor Peter Spencer, chief economist to the Item Club, will say: "With consumers repaying debt and fiscal policy inevitably tightening in the UK after the election, it is difficult to see any serious potential for a sustained recovery in domestic demand.

"There could still be substantial pain to come for corporates and consumers."

He said a sustainable recovery the UK economy needs world trade to pick up and there is not much sign of that happening.