Prospects for the UK Economy

Hope for the UK economyOnly last week the Office for National statistics (ONS) released data showing that the UK is deeper in recession than expected, with economic output falling for a 3rd successive quarter in a row.

Where Q4 2011 saw output fall to -0.3% and the UK went back into recession in Q1 2012 with an economic downturn of -0.2%, Q2 2012 saw a dramatic and unexpected fall to -0.7%

The National Institute of Economic and Social Research (NIESR) has also released figures showing an in-depth analysis of the data. The NIESR’s forecast for the UK economy predicts the following prospects for the country:

  • The economy will contract by 0.5% in 2012
  • However, economic growth will increase by 1.3% in 2013
  • The Consumer Price Index (CPI) will drop below 2% by the end of the year
  • Unemployment will peak at 8.6% in Q2 of 2013
  • The budget deficit will be dealt with by 2016-2017

The NIESR also blames the "jubilee effect" for an estimated 0.4% drop in Q2 2012 (April – June) where an accumulation of replanned and additional bank holidays reduced the country’s productivity. This still shows an underlying negative growth but this is expected to rebound in Q3 of 2012 (July-September).

The trend, according to the institute, shows that, despite the ups & downs and the entering of a "double-dip recession", economic output for the UK has effectively been flat for the last two years.

Growth in the UK is expected to be impeded by weak demand in the global economy with particular focus on the country’s main trading partner, the Eurozone. The expected 1.3% uplift in home output next year could still be adversley affected by any negative movements in Europe.

The positive side of the predicitions are that unemployment will increase next year but remain at this year’s levels and growth is expected to rise to 2.4% in 2014.

Government borrowing is forecast to be higher than the Office of Budgetary Responsibility’s predictions, but the NIESR believe this to be only a cyclical, temporary, and not a more fundamental structural "blip".

Chancellor George Osborne’s austerity measures are expected to reduce the budget deficit to zero and return the country’s fortunes to a surplus by 2016-2017.

The NIESR report points to one reason for the economic weakness in supply and demand being supressed, chiefly from the lack of finances available from the banking sector. Whilst also recognising the benefits of the likes of the past National Loan Guarantee Scheme and it’s successor the new Funding for Lending scheme (FLS), the institute still calls the Government’s approach as "piecemeal" and believes a more structured approach is needed.

Ultimatley the NIESR states its case that the Government has scope for a "less aggressive path of fiscal tightening" and that finding the finances for key public sector works and comprehensively restructuring the banks and "key funding markets" will provide a way out of the current economic situation but with less of the negative affects that certain social and economic sectors of the country are enduring.

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