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By Cara Waters | Published Jul 26, 2011

Market view: 'Anaemic' growth shows need for plan B

Industry experts said the Gross Domestic Product (GDP) figures published today (26 July) were "pretty abysmal" and showed the UK economy needed rebalancing.

The Institute for Public Policy (IPP) think tank warned the UK's recovery was half as strong as the original prediction made by the Office of Budget Responsibility (OBR).

Nick Pearce, director of the IPPR, said last June, the OBR predicted GDP would grow by 2.6 per cent in 2011 but even if the economy got back on track in quarters three and four this year, it will barely reach 1.2 per cent.

He said: "As expected, today's growth figures show the UK recovery is anaemic. Outside of London in particular the recession continues to be felt and the UK economy might as well still be in recession, even if technically it isn't.

"Borrowing is likely to rise because of weak growth and lower tax receipts. It is time for the Chancellor to seriously consider a plan B for deficit reduction that puts growth and jobs first."

Jeremy Batstone-Carr, head of private client research at Charles Stanley, said there had been a "non-reaction" in the financial markets to the figures.

He said: "It was the service sector that performed very strongly in the data. Quite where this leaves attempts to rebalance the economy remains to be seen because as we know the exports sector and manufacturing were not strong.

"The authorities will take growth from wherever they can get it."

Mr Batstone-Carr said the real test would be the third quarter results, where he predicted the economy would stay in positive territory.

He said: "Perhaps we need to give the UK economy the benefit of the doubt on this one. The figures won't impact on monetary policy as the Bank of England (BoE) has indicated base rates will be on hold.

"We will probably get a much better feel for the state of the economy when the third quarter data is out. In the meantime all eyes will be on the BoE."

Ian Kernohan, economist at Royal London Asset Management, also stressed more time was needed to assess the state of the economy.

He warned: "Preliminary estimates of GDP are often revised, sometimes quite heavily. Although there will be a lot of chat about what this number does or doesn't mean, a more accurate picture of the economy during the second quarter of 2011 will not be available for some time, perhaps years."

Mr Kernohan said the muted growth was in line with market expectations.

He said: "Thanks to the Royal Wedding and the Japanese earthquake, the MPC was already expecting quite a soft number, so I don't think this data will materially change their view about what is going on.

"The big picture remains unchanged: the UK economy is going through a major rebalancing, from private and public consumption to net exports and business investment, which will take several years to complete."

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