UK Recovery Still Fragile

This week, UK GDP growth for the first quarter of 2010 was revised up to 0.3%. And although this number may look encouraging it is very unlikely that this year British economy will record any significant recovery.

Indeed, most of last quarter's upward revision came from improvement in the manufacturing sector, which recorded 1.2% growth. Yet, this upturn in production may be short lived as it was the result of inventory adjustments and rise in exports prompted by weak pound. In fact, instead of trying to increase market share by lowering foreign currency prices, exporters have been rebuilding their profit margins. This in connection with weak growth in Europe, which imports 50% of  UK products may sooner or later erase the advantage of lower exchange rate.

Looking further, the new government effort to cut huge budget deficit (11.5% of GDP last year) is expected to pull down public spending and bring tax increases. In fact, so far the main rate of Value Added Tax was increased to the level from which it was dropped to fight recession. In addition, in May Britain’s finance minister announced £6.2bn worth of budget cuts, which are likely to be just the beginning of much stronger savings planned to bring to life at the end of this year. As a result we should anticipate additional drop in consumer spending which in turn may make companies to postpone investments and hiring and slow down the recovery.

Anna Fedec,
5/25/2010 3:05:59 PM