Economic Prospects - UK Outlook | EEF

Economic Prospects - UK Outlook

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The next blog is our series focuses on what the remainder of this year holds for the UK economy.

The consensus view has now converged towards fairly mediocre GDP growth in q2. Given the disruptions following the disaster and Japan and the many bank holidays over this period, whatever the first release tell us later this month, it won't be much about the underlying health of the recovery.

So looking to q3 and beyond our central forecast for the UK economy is a continuation of the modest recovery we have seen in the first half of 2011. Weak growth in consumer spending and contractions in government spending will be somewhat offset by stronger contributions from investment and net trade as the economy continues to rebalance.

Consumer spending is being dragged down by falling real wages on the back of high inflation and subdued wage growth. After growth in the range of 0.2% to 0.3% quarter-on-quarter for the rest of the year, private consumption is expected to pick up gradually in 2012, although annual rates of growth even in 2012 will be meagre compared with the decade leading up to the recession.

Spending by government will also be a drag on growth. The start of the fiscal year in April means reductions in government consumption begin to bite with quarter on quarter contractions forecast for the remainder of 2011 and right through 2012.

Growth in exports in goods and services is forecast to exceed 7% annually in both 2011 and 2012, well ahead of imports growth at 2.3% and 3.8% respectively, ensuring that net trade adds to overall growth in both years. However, we will not see a net trade contribution of the magnitude posted in the first three months of this year.

Since the recovery began in 2009q4, it has been characterised by continuing uncertainty and fluctuating outturns in the official data. Reflecting this, our central projection faces both downside and upside risks.

On the downside, the risks are largely international ones. Further rises in commodity prices offer the potential for feeding through to higher inflation, particularly concerning if this moves inflation expectations up. The eurozone crisis has intensified, with the once unthinkable possibility of a Greek default looking likely and uncertain consequences for the UK. Further afield, recent cooling in commodity prices may indicate a weakening in demand from China, a key source of growth in UK exports.

On the positive side a stronger performance than currently expected in the labour market could help boost modest expectations for consumer spending in 2011. And an easing in credit conditions, particularly for smaller firms, may see investment intentions materialise into greater actual investment.

Tomorrow we'll be homing in on three areas to key an eye in on in the coming quarter – the indicators that will tell us whether the recovery is still on track or knocked off course.


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