UK economy poised to escape recession despite forecast of feeble growth

By SCOTT REID
Published on 22/04/2012 00:00

BRITAIN’S economy remains on the critical list, economists have warned, although figures this week are likely to show it skirting a recession in the first quarter of the year.

Official statistics, due on Wednesday, are tipped to reveal a modest rebound following a 0.3 per cent contraction in gross domestic product (GDP) at the end of last year.

Those prospects of slim growth – with most analysts’ estimates hovering between zero and 0.2 per cent – were boosted on Friday by news of the biggest increase in UK retail sales in more than a year.

However, other surveys have pointed to an economy grappling with austerity cuts and a slowing Eurozone, which is taking its toll on exports.

There are serious concerns that weak construction output will have been a major drag on the economy in the three months to 31 March. A recession is defined as two quarters in a row of decline and there is still an outside chance that this week’s GDP reading will prove negative.

While the economy is nothing like as weak as in the previous slump in 2008-9, it is likely to struggle to grow amid high levels of unemployment and sticky consumer price inflation.

Howard Archer, chief UK economist at IHS Global Insight, forecast growth of 0.2 per cent in the first quarter but warned that there was still “major uncertainty” surrounding the data.

“Whether or not the economy grew in the first quarter of 2012, it still faces serious domestic and international headwinds, so it is likely to be vulnerable to relapses over the next few months at least,” Archer said.

Citi economist Michael Saunders struck an even more pessimistic tone, flagging quarter-on-quarter growth closer to zero.

He said: “The UK continues to show mild stagflation, with the economy roughly stagnant and above-target inflation and, as the Bank of England’s monetary policy committee admits, there is a chance that the first quarter shows ‘negative growth’.”

Another recession would heap fresh pressure on an embattled coalition government and spark more criticism that Chancellor George Osborne is harming the recovery with his austerity drive.

The Bank of England admitted this week, in minutes from its April meeting, that a recession was still possible but it was encouraged by data for the powerhouse services sector, which pointed towards underlying growth in the first half of the year.

Yet most economists agree that the UK’s growth in 2012 will be feeble and sporadic.Doubts are also growing that inflation will fall back to its 2 per cent target amid high oil and food prices, which last month triggered an unexpected rise in the cost of living, and will also act as a drag on the recovery.

The Organisation for Economic Co-operation & Development recently said it expects the UK’s economic output to have fallen by 0.1 per cent in the first quarter.