Focus: Safe on solid ground?

The Bank of England (BoE) announced last month GDP had increased by 0.1 per cent in three months to the end of 2009 after six consecutive quarters of contraction, which saw the economy shrink by 6.1 percentage points – 4.8 per cent in 2009 alone.

If this figure is accurate, it falls short of economists’ predictions of 0.4 per cent growth in Q4 2009 and the BoE’s own optimistic 0.6 per cent. By comparison, France and Germany both showed growth of 0.3 per cent in their first quarter of recovery more than six months ago.

This tiny expansion is despite - or perhaps because of - the government's car scrappage scheme and a consumer rush to beat VAT's return to 17.5 per cent after a 12-month temporary drop to 15 per cent.

Without such measures there is the real risk of dropping back into the red this quarter, economists say, and even chancellor Alistair Darling has admitted the road to recovery will be "bumpy".

Even ignoring the volatile output from oil and gas extraction, growth was only 0.2 per cent in Q4 after a flat Q3 2009. Additionally, the (barely) positive Q4 figures are the Office for National Statistics’ preliminary results based on just 40 per cent of relevant data. Data reviews expected on February 26 and March 30 could still go either way.

So what happens next? The London Chamber of Commerce and Industry has reported that more than 30 per cent of businesses now expect the economy to weaken this year, up from 20 per cent three months ago. The survey echoes many commentators’ predictions of anaemic growth and the real risk of a double-dip recession, particularly given the unsettling effect of a looming general election and the Bank of England's recent decision to pause quantitative easing (QE).

"The news suggests [recovery] is likely to be even more of an uphill struggle than had previously been supposed," Ted Scott, director of UK equity strategy for F&C Investments, says. "It means the UK economy will probably grow at well below trend - at about 2.5-3 per cent GDP per annum for the foreseeable future. The consensus forecast for 2010 is about 2 per cent, and this now looks too high in the light of the disappointing data for both the third and fourth quarters of last year."

The GDP announcement saw sterling plummet by 1.3 cents against the US dollar to $1.61 and by 0.45 cents against the euro to €1.14 after stronger growth priced into the market failed to materialise. Along with the risk of an indecisive election, the greatest effect on sterling’s performance in the short to mid-term is whether the BoE is spurred by the latest GDP figures into halting QE, which many believe it will.

"There can be little doubt that emerging from recession has come as a psychological boost to the UK economy, and has consequently given the pound some support," says Duncan Higgins, a senior analyst for Caxton FX.