U.K. Economy Struggles to Recover


Recent updates for the United Kingdom are showing that the road to recovery may be bumpy. In the first three months of 2013, the GDP expanded 0.3 percent quarter-on-quarter and 0.6 year-on-year. The rise was driven by the services sector growth and a bounce-back in North Sea oil and gas output.

Indeed, in April, the Services PMI index grew to an 8-month high. Additionally, the job market figures show some improvement: compared to the previous year, employment is up, unemployment and the claimant count are down, and the rate of inactivity is at its lowest since 1991. Also, in an effort to stimulate the economy, Chancellor Osborne announced several tax reductions including a corporation tax cut to 20 percent in his 2013 Budget speech. However, on the negative side, credit for companies remains scarce and businesses are putting off non-essential spending waiting for the economy to improve further. Also, consumer confidence remains gloomy. In fact, in April, retail sales contracted 1.3 percent mom. To make things even worst, both Moody's and Fitch downgraded United Kingdom from its AAA credit rating, as government spending cuts and the Bank of England's quantitative easing policy failed to stimulate economic growth. 


In the first quarter of 2013, the GDP expanded 0.3 percent compared with the previous quarter. Compared with the previous year, the economy expanded 0.6%, remaining mainly flat since 2011.
 


The benchmark interest rate is set at an all-time low of 0.5 percent since March of 2009 and the asset purchases programme (through treasury bills' issuance) is at a record high of £375 billion per month. However, higher-than-expected inflation rates and concerns over the sterling make the scenario of further QE unlikely.

     

The Moody's and Fitch sovereign debt rating downgrade led the pound to plunge against both the euro and the dollar. Yet, the sterling depreciation is not a concern for the Bank of England as it is likely to make exports cheaper and spur growth.
 
In March, the unemployment rate fell to 7.8 percent. More importantly, the number of unemployed persons has declined to 2.52 billion, down 92 thousand from the same period last year.

 


Nuno Fontes | nuno@tradingeconomics.com
5/22/2013 9:34:05 AM