British Economy Should Remain Weak in 2010

Strong external growth, better demand for housing and a drop in the pace of destocking indicate the recession in the United Kingdom may be coming to an end. Yet, at Trading Economics, we think that improvement in economic indicators doesn’t necessary mean the UK economy is out of the woods.

Indeed, recent data signals the worst of this recession cycle may be over. In fact, the third largest economy in Europe should record GDP growth in the third quarter of 2009. Moreover, the value of exported goods increased 5% in July m/m, the strongest rise since January 2008. Also, industrial production rose 0.5% m/m in July, following an upwardly revised 0.6% rise in June. More importantly, the infamous housing market continues to show signs of stabilization. Latest data from the Financial Services Authority confirmed an increase in mortgage lending and a decline in the number of homes being repossessed by lenders.

Having said that, positive growth numbers may not bring the expected stabilization the British are hoping for. Instead, we should expect further increase in unemployment rate since the labor market hasn’t adjusted yet to the recessionary trend. Looking further, a weak pound is triggering a rise in import prices, which may weight heavy on inflation and hamper the still fragile recovery in consumption. Also, we should not forget about the fiscal deficit, which has continued to soar in recent months. In fact, this fiscal year deficit may reach 13.4% of GDP government as tax revenues have dropped 11.4% y/y and spending went up 6.9% y/y.

Anna Fedec,
9/23/2009 10:03:15 AM