Market view: UK recovery 'not going to plan'
Institute for Public Policy Research warns that confidence in the economy remains low and that the export market alone is keeping UK out of recession.
Confirmation today that UK GDP grew by a modest 0.5 per cent in the first quarter has led several major analysts to question the strength of the economic recovery, with a key think-tank warning that it is "not going to plan".
The latest UK gross GDP figures published today (25 May) show an estimated increase in growth of 0.5 per cent during the first quarter of this year, unrevised from the 0.5 per cent first estimate published.
The final quarter of 2010 saw GDP fall by 0.5 per cent, following a year-long spell of positive growth figures from the third quarter of 2009 to the third quarter of 2010.
The UK's annual growth rate during this period was 1.5 per cent and last month’s GDP figures saw a rise of 0.5 per cent.
Tony Dolphin, chief economist at the Institute for Public Policy Research (IPPR), said that the recovery was "not going to plan" and warned that exports alone have saved the UK from a double-dip recession.
He said: "The government has said it wants to rebalance the economy away from debt-funded domestic spending and towards exports.
"The export side of this shift is progressing well and lending figures show that increases in debt across the economy are modest. The problem is that confidence is low and real incomes are contracting, so households and businesses are now reducing their spending.
"This was not part of the plan. Increased certainty about the public finances was supposed to lead to increased confidence and more spending.
"Instead, greater uncertainty about the economic outlook – and some bad luck with global commodity prices – has led to reduced confidence and less spending. Were it not for the export boom, the UK would now be back in recession."
Jeremy Batstone-Carr, head of private client research at Charles Stanley, said the GDP figures showed the UK economy was faring badly.
He said: "The figures may not seem that exciting on the surface but still waters run deep. The breakdown of the GDP figures is quite significant.
"In particular we saw a very sharp fall in consumer spending or household consumption which may reflect the VAT hike but does not bode well going forward.
"It does suggest it is going to be very hard to get the UK economy moving. It is no great surprise that the Organisation for Economic Co-operation and Development today has downgraded its forecast for economic growth in the UK economy from 1.5 per cent to 1.4 per cent in 2011.
"Trade is being regarded by some as positive but it is dependent on the export market. Given my negative expectations for exports I am not perhaps as sanguine as others."
Mr Batstone-Carr said it was likely the GDP figures would dissuade the MPC from an interest rate increase in the near future.
"The Bank of England gives us to expect there will be rate hikes but given the ongoing weakness of the economy there is still the possibility we will not see a rate hike in August.