UK News

from Breakingviews:

UK’s problem: it’s the best in Europe

By Ian Campbell

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

UK GDP stalled in the fourth quarter, contracting by 0.2 percent. That’s bad. But which major west European economy will perform best in 2012? It’s the UK again, the IMF predicted this week.

Britain’s main problem is that it’s doing best in a troubled continent. If it achieves the meagre 0.6 percent growth the IMF predicts in 2012 it will have grown twice as fast as France or Germany and have evaded the 0.5 recession the IMF forecasts for the euro zone as a whole. The euro zone’s fiscal pain is the main obstacle to a firmer British recovery.

UK cuts, it’s true, aren’t helping growth in the short term. Since April austerity has kicked in hard, booting 193,000 unfortunate public sector employees out of work. Unemployment has risen to 2.7 million and will go higher.

But it is Europe, more than government cuts, which has dragged the UK back into negative territory. Half of British exports go to the euro zone. In December the CBI’s export order balance dropped to a 23-month low. Export weakness helps explain why industrial production plunged by 1.2 percent in the fourth quarter. Service industries, more domestically oriented, held up better.

December economic surveys point again to slightly firmer UK growth. The problem is that the European risk isn’t about to go away. In Italy and Spain the IMF foresees deep recessions, GDP declines of close to 2 percent this year and more shrinkage in 2013. What will that do to southern Europe’s debt servicing capacity?

from Breakingviews:

Becalmed UK in danger of double dip

By Ian Campbell The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

The UK economy looks dangerously becalmed. While GDP did increase a good-looking 0.5 percent in the third quarter, the number was flattered by a catch up from a royal wedding-distracted spring. Besides, there has only been a 0.5 percent rise over the full year. And now a euro zone storm is brewing. That Tuesday's UK manufacturing survey for October dropped to the lowest level for over two years is no coincidence -- but is alarming.

It was always going to be tough for the British recovery to pick up pace. It has to deal with many adverse currents: tighter fiscal policy, depressed wages and high global commodity prices. Strong export demand would have helped. But now recession threatens the euro zone, the UK's largest trading partner. The single currency zone has to deal with financial sector stress and fiscal tightening, and its central bank has been less accommodating than the Bank of England.

British policymakers will come under pressure to do more. The Bank of England has already responded to the European threat, and more promptly than the European Central Bank, by launching a 75 billion pound QE2 lifeboat. George Osborne, the Chancellor, promises more help on what he calls "credit easing" later this month. But it is hard to be optimistic that either policy will achieve much. Mervyn King thought QE2 would help avert worse credit tightening.

Another dip into recession will be hard to avoid. That will be arduous -- above all for the 2.6 million unemployed Britons. The malaise will put political pressure on the government to take a risk on fiscal policy. A fiscal U-turn, a tax cut or additional government spending in employment-generating capital projects, would be more likely to get the economy moving again.

The government is understandably reluctant. The fiscal deficit is obscenely big and its opponents will say "we told you so". But, as in any emergency, plans change when things go bad. The risk for the UK government is that things will get considerably worse.

from MacroScope:

Economists vs the zero barrier

Anyone involved in financial markets on a day-to-day basis will be familiar with bits of jargon like “breaking the psychological barrier”, “passing key resistance levels,” and even “magic numbers”.

While academics might argue if such things exist, market players put a lot of weight (and money) on the way certain financial instruments, indexes and currencies seem to behave near a certain number – usually a round figure.

Economists, looking months and years into the future to predict the path of entire economies, could well declare themselves immune to the superstitions of daily market movements.

But they too are victims of the psychology of round numbers – or to be precise, zero.

Take Tuesday’s shock preliminary UK GDP figures, which at -0.5 percent came well under even the most pessimistic forecast for +0.1 percent growth.

It’s always easy to say in retrospect, but there were some clues that a below-zero figure might have been on the cards. PMI surveys two weeks ago showed Britain’s service sector, which makes up the bulk of the private economy, declined unexpectedly in December, as did the construction sector. Retail sales figures for last month were also dire.

Still, no economist was willing to break through that zero threshold – and not for the first time.

from Matt Falloon:

It’s snow joke

Snow or no snow, these GDP figures are a nightmare for the Conservative-Liberal Democrat coalition government and throw up the risk of a self-fulfilling spiral of gloom.

When the shock 0.5 percent drop in economic output at the end of 2010 hits television screens on Tuesday night as families sit down to dinner, already-cautious consumers will feel more than a winter chill.

These numbers are likely to knock confidence just when the government needs businesses and households to step up to the plate.

Will businesses unleash investment and take on hoards of new staff now, or will they wait for signs of improvement?

Will families, facing a hike in VAT sales tax and high inflation, flash the credit card on big purchases or tighten their belts and hope for cheaper prices in the future?

If either of those scenarios play out over the next few months, Britain's economy faces a real risk of stagnating or worse -- and that doesn't even start to take into account the spending cuts waiting in the wings this year.

Even without the snow, the economy still ground to a halt in the last three months of 2010.

from The Great Debate UK:

Why is the UK still in recession when the U.S. isn’t?

Recent U.S.  gross domestic product data show the world's biggest economy emerged from recession in the third quarter, while in the UK data show that in the same period Britain's economy contracted.

British economist and author John Kay theorizes that Britain is mired in its worst recession on record in part because government support has not been evenly distributed across sectors.

"We've poured money into the financial sector -- by and large the financial sector in Britain is doing OK," he said.  "But very little of that is getting through to small and medium-size businesses out there in the rest of the economy."

Where is the economy headed?

Britain’s second-quarter GDP growth was precisely zero, reflecting the country’s weakest performance since the recession of the early 1990s.

With growth in the services and manufacturing sectors equalling the dismal figures of 2005 and interest rate futures rising, it’s a double whammy, hitting both our pockets and, some would say, our morale.

At the same time, inflation currently stands at more than twice the central bank’s 2 percent target, hampering the Bank of England’s ability to boost growth by bringing down interest rates.

Most analysts do expect it to cut rates and some predict a move before Christmas. Others say it will have to wait longer.

Do you think the Bank needs to act sooner to prevent a full-blown recession of two quarters of negative growth? Just how bad do you think the economic slowdown will be?