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News: "UK could still avoid double-dip recession."

Mon, 27 Feb 12

A contraction in the UK economy at the end of 2011 was last week confirmed by the Office for National Statistics.

The second estimate of UK output indicates a quarter-on-quarter decline of 0.2% in Q4 2011.

According to Rob Harbron, economist at the Centre for Economics and Business Research, within the gloomy headline though some good news can be found.

UK consumers started spending again in the final three months of last year as household expenditure rose by 0.5% over the previous quarter, following four consecutive quarters of falling consumption.

Consumer spending is important for UK growth as it makes up over three-fifths of the total economy. Modest positive growth in household expenditure is expected to continue in 2012, as rapidly falling inflation takes the pressure off household budgets - indeed, the January Asda Income Tracker shows the smallest annual decline in discretionary income since June 2011.

However business investment, another key component in stimulating growth, was disappointingly weak in the final quarter of 2011. Investment fell by 5.6% compared to the previous three months and by 1.9% over Q4 2010, highlighting on-going tough conditions for UK businesses.

This suggests that the Office for Budget Responsibility's expectations of 7.7% business investment growth over 2012 may be difficult to achieve - Cebr expects a softer investment expansion of closer to 2.0% over the year.

The latest figures continue to paint a picture of the fragile economic climate that faced the UK during 2011.

Consumer spending fell across the year as a whole by 0.8%, and total UK output still remains 3.9% below the Q1 2008 peak.

Harbron said: "Tentative signs of improvement look to be emerging for the coming year though. The latest leading indicators from Markit/CIPS suggest more robust growth is returning across the economy. The UK's net trade position, another important driver of overall growth, has been generally improving as exports grew in real terms by 4.8% over 2011, far stronger than import growth at 0.6%.

"While the picture is improving, risks remain as the euro zone is likely to contract in 2012, posing a threat to export demand. Likewise the price of oil, which has been steadily rising during 2012, could place pressure on consumers and business costs.

"On balance the UK may yet avoid falling back into a technical recession, but don't bank on robust growth in 2012 - we continue to expect the Bank of England to further extend its quantitative easing on top of the additional £50billion announced in February."


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