The worst may be over, but the UK’s return to growth could be painful
THE WORST is now over for the UK economy, but the path back to growth will be slow and painful, according to an increasing number of economists.
While last week’s GDP figures confirmed the UK economy shrank 1.9 per cent in the first quarter of this year compared with the previous quarter – its sharpest fall since 1979 as households slashed spending at the fastest rate since 1980 – the data is historical.
More recent data, such as the April PMI CIPS/Markit survey shows that activity in the services sector, which accounts for three quarters of the economy, shrank at its slowest pace since last August. Meanwhile, official manufacturing numbers show the sector is contracting more slowly, and the level of mortgage approvals for house purchase and housing transactions have ticked up.
“While collectively the figures fall short of saying that the economy is in the process of recovery, they are pointing towards an end to the recession reasonably soon,” says Investec economist Philip Shaw.
However, an end to the recession does not necessarily mean an end to the economic pain. The impaired financial system and poor credit availability, together with the UK’s dire fiscal position and consequent likely interest rate hikes from next year mean a return to anything like normal conditions is still a long way off, say economists.
“It is likely to be a long time indeed before the UK returns to a period of robust and steady expansion,” says Colin Ellis, European economist at Daiwa Securities.
Bank of England deputy governor Charles Bean also urges caution. “The encouraging signs – I hesitate to identify them as ‘green shoots’ – do not tell us much about the strength and durability of the subsequent recovery,” he says.
Meanwhile, with the fiscal deficit surging, major tax hikes or cuts in public spending, urged by both the IMF and S&P, will be necessary, proving a sizeable drag on the economy for an extended period to come.