Britain set to defy double dip
BRITAIN will avoid sinking into a double-dip recession and its economy will be expanding at trend growth rates as early as 2012, a leading think-tank will say today, adding to the increasingly rosier outlook for the UK and defusing fears of further economic contraction.
In its latest forecast for the UK economy, the National Institute for Economic and Social Research (Niesr) predicts GDP growth of 1.3 per cent this year, 1.7 per cent next year and an acceleration to 2.2 per cent in 2012.
Strong economic data over the past week, culminating in an extremely positive retail sales report from the CBI, yesterday pushed the pound to a five-month high of $1.5585.
The CBI said that a net 33 per cent of retailers were reporting rising rather than falling sales compared to last July and are even more optimistic about the prospects for August. The survey boosted analysts’ hopes that the UK can achieve further decent growth in the third quarter.
However, they remained gloomy about the long-term prospects – Capital Economics’ Vicky Redwood said: “We remain sure that the fiscal squeeze will slow the consumer recovery eventually – but there’s no sign that this is happening yet.”
The Niesr also forecasts subdued growth in consumption with per capita consumer spending not expected to recover to its pre-recession peak until 2015. This is partly due to the coalition government’s aggressive fiscal consolidation programme and austerity measures such as the VAT hike.
“Growth will be more dependent on the contribution of net trade, while public spending will pose a drag on economic growth for longer than had previously been expected. Public sector spending cuts will subtract from economic growth in every year from 2011 to 2015,” the think-tank said.
The plans are front-loaded in spending cuts and consequently, the think-tank doesn’t forecast unemployment to start falling consistently until the end of 2011.
The Niesr’s Simon Kirby said: “This is partly because of public sector job losses but even the private sector is weak at the moment.”
Next January’s VAT increase will keep inflation above the Bank of England’s two per cent target until 2012, when the tax hike will drop out of the annual comparison. This will make the Bank of England’s message more difficult, said Kirby, who added that the Niesr expects rates to start rising in the second quarter of 2011.