Research Dept. News
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Monthly Report, num 349 - September 2011
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European union - United Kingdom
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The United Kingdom: social unrest within a complicated economic scenario
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Britain's growth figures for the second quarter are weak.
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The social unrest experienced by the United Kingdom has surprised everyone and has raised doubts as to the leadership skills of the British prime minister at a time when leadership is vital in order to redirect the course of the economy. The fact is that economic figures are still doggedly pointing towards an economic slowdown in the United Kingdom, a situation that had already been ruled out months ago by the consensus of economic forecasts.
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Even the Bank of England, in its August Inflation Report, revised the country's growth prospects downwards, while the governor of the reserve bank, Mervyn King, warned of the risk of inflation being temporarily above 5% over the coming months. For the moment, the latest data on the CPI for July remain at a stubborn 4.4%. In the minutes of the meeting on 3 and 4 August, the members of the central bank's Monetary Policy Committee stated unanimously that they would keep the official interest rate at 0.5% given the deterioration in the economic outlook. We should remember that, in previous meetings, some members had even voted in favour of a rise in the nominal reference interest rate. Something that, today, appears very remote.
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The scenario of fiscal adjustment and the deterioration in households' disposable income augur moderate growth for the remainder of the year.
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Certainly second quarter GDP growth slowed up to 0.2% quarter-on-quarter from the 0.5% of the first quarter, while year-on-year growth went from 1.6% to 0.7%. These figures reinforce the theory that the recovery will continue to be very gradual. Such slowness is weighing heavy on households and is hindering the recovery in private consumption. Whereas the sales animated the British in June, in July the figures for retail and consumer goods once again looked very weak. Moreover, the labour market is still failing to show any clear signs of improvement and unemployment actually increased slightly to 4.9% in July.
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In short, the economic situation is moving within parameters of great weakness: between tough fiscal adjustment and poor performance by the net disposable income of households due to rising unemployment and the high level of inflation, which is rising faster than wages. A complicated scenario which means that we will probably have to revise our 2011 GDP growth forecast downwards for the United Kingdom, currently at 1.6%. However, we keep to our forecast of 4.3% inflation in 2011 as, in spite of the increases in basic energy service prices, which will be passed on to consumers in their electricity and gas bills over the coming months, we believe that inflation will fall subsequently due to the disappearance of several temporary effects that have raised British prices over the last few periods.
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