In 2010 both the Chancellor and the Governor of the Bank of England were at pains to suggest that given major uncertainties the economy faced a ‘choppy' recovery. Economic data for the year so far have borne this out. Over the next week our blog will look at what the rest of this year might hold.
But first where have we got to with the recovery to date?
The start of this year saw the last contribution from government spending to overall growth as the new fiscal year heralds the beginning of fiscal retrenchment in earnest. The spending cuts are also part of the story weighing on consumer confidence as the private sector attempts to absorb public sector redundancies. This fits with further drags on consumer spending from falling real wages, a weak housing market, and a need to deleverage.
Business investment has been very patchy, contracting in 2011q1. The strong investment intentions reported in surveys are not yet translating into firm outturns. Companies' cash positions are strong but SMEs are struggling to access finance to help drive investment.
External demand has been an important factor in driving the recovery in the first half of 2011. Emerging markets have been the major source of strength for the majority of the recovery but in early 2011 European markets provided some strength, though Europe remains sharply divided between the core and the periphery.
Materials prices continued to rise into early 2011 with oil prices in particular jumping in response to Middle East turmoil. This has fed into uncomfortably high inflation. Despite concerns about strong price increases Bank of England policy makers have been split on rate changes this year. Concerns from some members about inflation expectations drifting higher have been offset by continued concerns about sub-par growth.
An unexpected disruption to global manufacturing supply chains, particularly in the automotive sector, followed the earthquake and tsunami in Japan in March. But the impact has largely proved to be temporary. Survey data for the first half of the year shows continued expansion in manufacturing activity with the sector now posting six consecutive quarters of growth.
The second quarter of this year has proved to be more challenging for manufacturing and the wider economy. In our series of blogs on economic prospects for the remainder of the year we will discuss our central forecast for both the UK economy and key international markets. We'll also highlight what would indicate a significant drift from our forecasts and the events that would suggest everything is going to plan and the things that could go really wrong. Finally, we'll take a glimpse at the outlook beyond 2011.