y Jovi Overo 25 Jan 2011
UK PRELIMINARY GDP (Q4) AND PUBLIC FINANCESWell, well, well…a shock or did everyone else just overestimate the recovery of the UK?
The fourth quarter GDP came out and showed a 0.5% quarterly contraction with the ONS claiming that the unexpected figures was down to the…SNOW! Without it, GDP would probably have been flat – suggesting that the UK economy had already run out of steam before the snow hit the country.
Economists said the first estimate of GDP for the last quarter was much worse than expected, and meant that Britain could now suffer a double-dip recession. With inflation hitting 3.7% last month, there are also growing fears the UK is heading for an unpleasant dose of “stagflation”.
Now, even if some of that lost output is made up in Q1, GDP, will rebound strongly this quarter before the effects of growth turns negative again in Q2. It will be some time since the true strength of the economy becomes clear.
The eagerly awaited GDP figures put the government’s austerity programme under fresh scrutiny, with the Labour Party again arguing that cuts are being made too deeply, and too rapidly.
“Even accounting for the snow today’s ONS figures show the Conservative-led government has no policies for growth,” said Labour MP Chuka Umunna, claiming David Cameron’s administration was “a government of bystanders”.
The chancellor George Osborne, though, refused to change tack despite the evidence that Britain’s economy shrank again.
“There is no question of changing a fiscal plan that has established international credibility on the back of one very cold month,” he said.
“That would plunge Britain into a financial crisis. We will not be blown off course by bad weather,” Osborne added.
The data sent the pound falling by more than one cent against the dollar to $1.576, and pushed the FTSE 100 index down by 36 points.
Deputy Prime Minister Nick Clegg said Britain’s economic recovery was still in its “early days”.
“The government has been doing the difficult work of putting the building blocks in place,” Clegg said. Source, The Guardian Newspaper
Despite the comments from the government we feel that the outlook still looks pretty gloomy. We have yet to see the impact of the January VAT hike and other elements of the fiscal squeeze. Households facing a toxic combination of weak wages growth, high inflation, rising taxes and falling house prices, GDP is not expected to be much higher than a sluggish 1.5% or less this year.
We feel that this number will ultimately put to bed the recent talks that the MPC has to start to increase interest rates and hopefully continue to provide the economy with as much support as it can.
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