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UK economic update
The UK economy shrank during the final three months of 2011 by more than was previously estimated. According to the Office for National Statistics (ONS), economic growth during the period was revised down to show a contraction of 0.3%, compared with previous estimates of a fall of 0.2%. The downward revision was attributable to weakness across the production, construction and services sectors. The ONS also revised down GDP growth for the full year of 2011 from 0.8% to 0.7%.
During the fourth quarter, activity in the services sector proved weaker than first estimated as companies cut back expenditure against an uncertain economic backdrop dominated by the eurozone’s sovereign debt crisis. On a slightly brighter note, the services sector registered monthly growth of 0.2% between December and January, having expanded by 0.3% between November and December.
Real household disposable income fell by 1.2% in 2011, registering its most drastic decline since 1977. The savings ratio – the proportion of post-tax income saved – dropped from 7.9% to 7.7%. Consumers remain under pressure from an uncomfortable combination of high inflation, an uncertain outlook for employment, low wage growth and tight credit conditions. Nevertheless, consumption managed to post a small rise during the fourth quarter.
The Organisation for Economic Co-operation & Development expects the UK economy to shrink at an annualised rate of 0.4% during the first quarter of 2012, moving the UK back into recession. For its part, the British Chambers of Commerce expects sluggish economic growth during 2012 but believes the UK will manage to avoid falling back into recession.
In March’s Budget announcement, the Office for Budget Responsibility (OBR) slightly increased its forecast for UK economic growth this year to 0.8%. Looking further ahead, the OBR expects the UK economy to grow by 2% in 2013, 2.7% in 2014 and 3% in 2015 and 2016.
The new GDP calculations show the UK economy moving back and forth between quarterly expansion and contraction during 2011, and the Bank of England expects a “zigzag pattern of alternating positive and negative quarterly growth rates” during 2012.
The Bank’s governor Sir Mervyn King warned that the UK’s fiscal consolidation and tight domestic credit conditions, combined with weakness among key overseas trading partners, were “acting as a drag on growth”. Looking ahead, analysts and economists are likely to await the preliminary GDP estimates for the first quarter – due for release on 25 April – with a degree of trepidation.
Paul Dixon FPFS
Chartered Financial Planner