U.K. Recovery Stronger Than Estimated
The British economy emerged from recession in the fourth quarter more strongly than initially estimated. The outlook for the economy is fundamentally weak and the prospect of a sluggish and fragile recovery remains.
The economy expanded 0.4% sequentially in the fourth quarter, better than the previous estimate of 0.3%, according to the latest report from the Office for National Statistics. On February 26, the statistical office had first revised fourth quarter growth to 0.3% from 0.1%. Economists had expected the ONS to confirm the 0.3% growth figure today.
The fourth quarter growth follows six quarters of contraction, which made it the longest recession since records began in 1955. Gross domestic product dropped 0.3% in the third quarter and 0.7% in the second quarter.
There are good reasons not to get too excited, said Jonathan Loynes, Capital Economics' chief European economist. The economy is operating a long way below its potential or trend level.
David Kern, chief economist at the British Chambers of Commerce, also shared the same view. He said, "It is clear that the UK recovery is still frail, vulnerable, and businesses are facing serious pressures." A double-dip recession is still a potential threat that must be avoided at all costs. Given the dangers still facing the economy, policy must remain expansionary, he added.
The household saving ratio was 7% in the latest quarter, compared with 8.4% in the previous quarter. Real household disposable income fell 1%, following a 0.6% increase in third quarter.
Further falls in the savings ratio will be needed if spending is not to decline, ING Bank NV's Mark Cliffe said. The decline in the saving ratio reflected higher borrowing as the housing market staged a modest rebound. However, households may have to scale back their purchases of assets as banks are likely to be less willing to lend and consumers less willing to borrow than in previous cycles.
On the production side, construction output was down 0.9% sequentially, compared with the 1.8% increase in the previous quarter. Output of production industries was unrevised at 0.4% after recording a 1% fall in the third quarter with manufacturing output growing 0.8%. Output in the service industries also remained unrevised at 0.5%. Agricultural output dipped 1.5%.
On an annual basis, economic contraction for the fourth quarter was lowered to 3.1% from 3.3%. GDP in volume terms fell 4.9% for 2009 as a whole, the largest fall on record, compared with a rise of 0.5% in 2008. Overall output declined by 6.2% during this recession.
ONS data showed a 0.4% sequential rise in household expenditure. Spending remained 2.1% lower than the fourth quarter of 2008. Government spending moved up 1% taking the annual growth to 2.2%. Meanwhile, gross fixed capital formation recorded a 2.7% quarterly fall and plunged 14% annually. Inventories continued to decline, down 2.6 billion pounds on the quarter.
According to Capital Economics' Loynes, the further upward revision to growth came primarily from an even bigger positive contribution from inventories. It is very unlikely that this component will have such a positive effect in the quarters ahead, the economist said.
Again, with income set to be squeezed further by high inflation and rising taxes this year, spending will possibly remain under pressure. Capital Economics forecast the U.K. economy to grow by just around 1% in 2010.
Last week, the Chancellor of the Exchequer Alistair Darling in his 2010 budget statement said the economy is expected to grow 3% to 3.5% in 2011, in line with the Bank of England estimate. The government maintained its growth estimate at 1%-1.5% for 2010.
ONS data also showed that the trade deficit in real terms increased to 8.3 billion pounds in the fourth quarter of 2009. Exports of goods and services rose 3.8% whilst imports were up 4.7%. The improvement in global demand conditions as well as a fall in pound had only a limited impact on the external sector, noted Loynes.
In a separate communique, the ONS revealed the current account balance recorded a deficit of 1.7 billion pounds in the fourth quarter. This compares with a revised deficit of 5.9 billion pounds in the third quarter. Economists had forecast a 5.1 billion pounds deficit for the final quarter. In 2009, the current account was in deficit by 18.4 billion pounds, compared with a deficit of 22 billion pounds in 2008.
News are provided by InstaForex.
