Research Dept. News
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Monthly Report, num 350 - October 2011
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European union - United Kingdom
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The United Kingdom: growth forecasts are revised downwards
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The storm is still rocking the boat of the United Kingdom in its journey towards a safe haven. The latest economic data have even led us to revise our growth forecast for gross domestic product (GDP) downwards for this year. Whereas our forecast was 1.6%, we have reduced this by five tenths of a percentage point to 1.1% for the whole of the year. However, we have maintained our 4.3% forecast for inflation. In short, a situation of less growth and high inflation, not a very encouraging panorama.
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The United Kingdom: negative economic figures are pushing down growth forecasts.
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The economic figures are clear. On the one hand, we have the data on retail and consumer goods for August, with year-on-year growth close to 0%. By component, it's interesting to note that food retail sales fell by 0.8% year-on-year while shop spending, excluding food, was down 1.3% year-on-year. These figures reveal the fragility of the household consumption trend; a weak pulse that will probably continue throughout the rest of the year. Households are trying to reduce their consumption given the drop in disposable income, hit by the fall in real wages, higher taxes and limited access to credit.
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Inflation remains high.
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Certainly, disposable income has been hit hard by stubborn inflation that remains at 4.5% year-on-year and might even rise above 5% in the next few months due to higher energy prices which will influence, with a slightly delayed effect, households' energy bills in the coming months. July's industrial production also fell by 0.7% year-on-year. The upturn seen last year, after the recession, is fading while firms are adjusting to more modest domestic demand and a decline in exports. This moderation in activity is leading to a slight deterioration in the job market, with the unemployment rate rising to 4.9% over the summer.
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Even the International Monetary Fund has commented that, depending on the pattern of growth, the authorities could postpone or relax the fiscal restrictions planned in order to avoid the risk of making the economic situation worse. In fact, this economic outlook has led economists to expect that the next move by the Bank of England might be expansionary in its quantitative easing programme; although certain scepticism still remains regarding the ability of this policy to kick-start the economy. However, due to the high level of inflation, expectations are that the reserve bank might wait until the beginning of next year to start this unorthodox expansionary monetary policy.
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The Bank of England might intensify its expansionary monetary policy.
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In summary, it seems that the economy of the United Kingdom will not be able to consolidate its exit from the recession, started at the end of 2008 and from which it emerged in the second quarter of last year. However, it will have another chance to do so next year, when inflation will fall considerably and fiscal restrictions will ease a little. In other words, the United Kingdom will be sailing under more favourable conditions next year. The important thing is to avoid any obstacles for what remains of this one.
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