Analysis: Brighter outlook despite the gloom

IT IS no surprise that the latest PWC forecast for the UK economy shows it faces significant risks during the rest of 2012 and 2013. The expectation is that GDP will not grow at all this year. Even this outcome will require a quite significant improvement in economic performance during the third and fourth quarters.

Statistics for the first half of 2012 show an economy struggling to keep its head above water. So, for the first quarter, revisions by the Office of National Statistics show GDP fell by 0.3 per cent rather than by 0.2 per cent, as initially estimated. First estimates of second-quarter performance by the National Institute of Economic and Social Research suggest a further 0.2 per cent decline during the second quarter. Thus, the UK economy will have to grow by 0.5 per cent during the third and fourth quarters if the level of GDP in 2012 as a whole is not to fall below that of 2011.

The PwC forecast takes a more optimistic view of 2013, suggesting the economy will grow by 1.7 per cent. It acknowledges there are risks, particularly those associated with the eurozone crisis.

Nevertheless, on the brighter side, the recent rapid decline in inflation will weaken the downward pressure on real household budgets and so should stimulate an albeit weak recovery in consumption.

While government and consumers have been struggling with indebtedness since the beginning of the recession, the corporate sector has been sitting on a mountain of cash. The PwC suggests some of this will be used to increase investment, which will also contribute to stronger growth in 2013.

PwC does not expect Scotland’s growth rate in 2012-13 to differ significantly from the UK as a whole. An almost flat performance during 2012, coupled with a growth of 1.4 per cent in 2013, will average out to a 0.7 per cent growth rate over the two years taken together. Nevertheless, this will still leave Scottish output well below its 2007 level, six years after the start of the recession.

PWC also does not expect house prices to return to their 2007 level in real terms until after 2020. Though they may reach the same levels in cash terms by the middle of the decade, housing market performance will continue to be weak in the short run.

PwC expects the UK to outperform most European economies during 2013. This means it is expected to change from having one of the EU’s weakest growth performances since 2010 to one of its strongest. This suggests it expects the euro crisis will be limited to the eurozone area.

• David Bell is professor of economics at Stirling University.