Recession may show signs of easing but it will be a long slow recovery

Published on Tuesday 29 September 2009 21:16

BRITAIN still faces a "long slow recovery", economists warned yesterday, after official figures showed the recession was not as deep as previously feared between April and June.

The UK economy is now odds-on to have pushed into positive territory during the third quarter, after final estimates for Q2 revealed a 0.6 per cent contraction in GDP.

It marks the second upwards revision to official data in as many months. Last month, the Office for National Statistics put the decline at 0.7 per cent, compared with an original estimate of minus 0.8 per cent.

The improved picture was put down to a better-than-expected performance by manufacturers and construction firms.

However, a downwards revision to estimates for the first three months of the year left the annual rate of GDP contraction at 5.5 per cent – the biggest decline since records began in 1955.

While the revised second-quarter numbers suggest the economy is staging a tentative recovery, analysts urged caution.

Howard Archer, chief UK economist at forecasting group IHS Global Insight, said "significant concerns" persisted over the "strength and sustainability" of the recovery.

"There is a serious danger of relapse early in 2010 as VAT rises back up and the car scrappage scheme ends," he warned.

"Furthermore, we suspect the upside for growth will be limited for some time to come by elevated and rising unemployment, stretched consumer and corporate balance sheets and muted bank lending."

Archer expects GDP growth to be limited to about 1 per cent next year, following estimated contraction of 4.3 per cent in 2009.

Vicky Redwood, at Capital Economics, said the improvement in output during the second quarter was "marginal compared to the huge amount of spare capacity building up".

She added: "It still looks likely to be a long slow recovery."

The view from the business world was equally measured. David Kern, chief economist at the British Chambers of Commerce, said: "There are now modest signs of improvement in the economy, but the risk of a setback remains significant."

There was also evidence yesterday of families rebuilding their finances, with the household savings ratio hitting 5.6 per cent – the highest for more than five years.

Saving rates have been steadily increasing since the onset of recession – after briefing turning negative for the first time at the beginning of 2008 – as households build up a buffer against the threat of unemployment.

But the measure still has some way to go to reach the double-digit saving rates common in the 1990s following the last recession.

CEBR economist Charles Davis said: "It is clear that households have adjusted to a more austere economic climate by cutting back on expenditure on non-essential goods and services like hotels and restaurants and, crucially, by saving more.

"The rise in the savings ratio is one of the key reasons why we expect growth to relatively sluggish as the economy recovers."

SLOWING MONEY GROWTH CASTS DOUBTS ON BANK'S 175BN PUMP PRIMING

FRESH doubts over the Bank of England's 175 billion efforts to aid the economy emerged yesterday, after figures showed money growth slowed during August.

The central bank's preferred measure showed money supply growth easing to 0.2 per cent last month, compared with a downwardly-revised 0.4 per cent in July.

Lending also fell by 9.8bn during August, much weaker than the 1.9bn fall seen a month earlier. The downbeat data comes six months into an unprecedented programme of quantitative easing – pumping billions in newly created cash into the money supply in an attempt to get the economy moving.

Yesterday, the Bank invited some 40 top economists to Threadneedle Street for discussions over the impact of the strategy. Capital Economics' Vicky Redwood said: "The latest broad money figures suggest that QE is still having a limited impact."