British Economy is Recovering But is Not Out of the Woods

In the fourth quarter of 2009, the United Kingdom economy expanded 0.1% qoq, finally emerging from the longest and deepest recession since the mid-1940s. Yet, the recent wave of optimism may be way exaggerated since recent growth is mainly supported by fiscal and monetary stimulus.

In fact, according to the preliminary GDP estimate, the biggest part of fourth quarter expansion came from the service sector with distribution, hotels and restaurants contributing most to the increase. Also, vehicle and retail sales showed considerable growth. And, that should not be a surprise. The end of the year spending was stimulated by cuts in value added tax, low energy prices and low interest rates.

However, with a rising cost of energy, still weak labor market, high indebtedness of British households and the end of tax cuts, consumption may deteriorate again. Investors are also becoming more concerned about UK's mounting fiscal deficit. For example, UK Treasury projects that public borrowing may reach £178bn this fiscal year or 12.6% of GDP. And with the current pace of growth the debt may rise to 77% of GDP by 2013. That said, growing public liabilities may prompt investors to sell the government bonds thus making interest on debt more expensive and eventually slowing the current economic recovery.

Anna Fedec,
1/30/2010 12:58:15 PM