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Latest UK economic update

<< News archive January 2012

24th January 2012

Notwithstanding the London Olympics and the Queen’s Diamond Jubilee, 2012 is widely expected to be a tough year for the UK economy. The Ernst & Young Item Club (E&YIC) warned that the UK might already be back in recession. Although the prospect of a “serious double-dip” is not considered likely, E&YIC believes the UK economy is unlikely to achieve positive growth before 2013, warning: “The longer the uncertainty continues, the more debilitating the impact... on the UK’s economic prospects.”

The Centre for Economics & Business Research (CEBR) believes the UK is already in recession and expects the UK’s economy to shrink by 0.4% in 2012. However, if the eurozone should break up, the CEBR believes the UK economy could contract by as much as 1.1% this year. Meanwhile, the British Chambers of Commerce considers that recession is not a foregone conclusion, although the UK economy is likely to undergo a period of stagnation.

The Bank of England’s (BoE) Monetary Policy Committee maintained UK interest rates at 0.5% for yet another month. The annualised rate of inflation eased from 4.8% in November to 4.2% in December, and the Consumer Prices Index experienced its most substantial annualised monthly drop since between November and December 2008. The rate of unemployment rose to 8.4% during the three months to November, reaching its highest level since 1995.

According to a survey conducted by the Nationwide Building Society, consumer confidence is at “a low ebb”. Concerns over rising unemployment and steep increases in the cost of living have been exacerbated by uncertainty surrounding the outlook for the eurozone’s debt crisis. Elsewhere, against a backdrop of anaemic mortgage lending, the BoE warned that credit availability is likely to be dampened by the current economic uncertainty. Smaller companies’ appetite for credit fell sharply during the fourth quarter of 2011, while default rates on loans to medium-sized and large firms rose during the period.

UK companies are in relatively good shape with strong balance sheets and sizeable cash reserves; however, low confidence is leading to cuts in spending and recruitment. E&YIC warned that, contrary to earlier hopes, job losses in the public sector are not being offset by the private sector. Looking ahead, E&YIC urged UK companies to ensure they plan for different scenarios: “No-one really knows how the eurozone crisis is going to play out. Doing nothing is simply not an option.”