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Recession in UK is over but economists still see trouble

02.03.10
 
The pound sank again yesterday as figures showing that Britain had emerged from recession more strongly than first thought simply raised fears of a so-called double-dip. News that the economy grew by 0.3 per cent during the final three months of 2009 - up from the previous estimate of just 0.1 percent - ignited concerns that this extra
growth had been 'borrowed' from the first three months of 2010 as shoppers brought forward purchases to beat the rise in VAT at the end of last year.

 

Economists said this increased the possibility that figures for the first three months of 2010 could be worse than those for the end of 2009. Economists also warned that another possible explanation for the better growth in the last three months of 2009 was that the Office for National Statistics also revised its estimate for what happened from July to September last year. The ONS said the economy contracted by 0.3 percent in this period and not by the 0.2 percent thought - which, economists said, could also have contributed to the higher quarter-on-quarter growth seen from October to December.

 

Ross Walker, UK economist at Royal Bank of Scotland, said of the latest figures: 'The upward revision to GDP was higher than expected, but the detail of the data gives rise to significant concerns. There is scant evidence here of any fundamental improvement in demand or the much needed macroeconomic rebalancing.'

 

Adam Chester, economist at Lloyds TSB Corporate Markets, said: 'I don't think we're out of the woods. There is still a distinct possibility that we could dip back into the red in the first quarter.' Sterling - which has fallen by almost seven cents against the dollar so far this month - dropped to $1.5151 on the news, its lowest level since May last year, before rallying slightly to $1.5232. Against the euro, the pound fell to as low as 1.1185 at one stage, its lowest level since early January. Against the Japanese yen, sterling fell to its lowest level for 11 months.

 

Currency experts said the upward revision in the GDP data, signalling a stronger bounce than expected out of the longest recession since the
Second World War, had not significantly changed the outlook for the pound.

 

Neil Mellor, currency strategist at Bank of New York Mellon, said: 'There are multiple factors weighing against sterling, in particular the fiscal situation and the prospect of a hung parliament. We expect the pound to remain under selling pressure.'

 

Mark Bolsom, head of the UK trading desk at Travelex, the currency specialist, added: 'The GDP figure is now historical. Since then, there has been a string of really poor data out. January's retail sales were dire, the claimant count has shot up and our national debt has increased. That's why the pound dropped in response to what is, in theory, good news.'

 

Duncan Higgins, senior analyst at the brokerage Caxton FX, added: 'It will take a whole deal
more than this upward revision to offset the effects of a spiralling deficit. The growth figure is still too disappointing when compared with other G20 nations and recessionary pressures are far from over.'

 

Highlighting the economy's poor performance, figures published only hours later showed that the US had growth of 5.9 percent during the final three months of 2009, up from the 5.7 percent previously reported. Economists fear that Britain remains at risk of a double-dip recession because January's poor weather, the increase in VAT and the end of the car scrappage scheme are all likely to have hit economic growth during the first three months of this year. James Knightley, economist at the investment bank ING Markets, said: 'The momentum we had been hoping that the UK would be carrying into 2010 may be falling away already. Some of the weakness will be weather related, but election uncertainty and the implications for taxes and public sector employment is likely to
keep sentiment and activity subdued,.'

 

While weak sterling is pummelling consumers, who find it more expensive to go on holiday and buy imported goods, there are hopes that it could help exporters, as British-made goods become cheaper in overseas markets. There was a glimmer of hope that this may be starting, as ONS data showed that exports jumped by 3.7 percent in the final quarter of 2009, the fastest rate of growth in in nearly four years.

 

However, the scale of the toll taken on the economy by the downturn was also laid bare yesterday, as separate revisions to the figures revealed that the economy shrank even more than previously thought. The ONS said the 'peak-to-trough' contraction suffered by the economy during the recession was now 6.2 per cent - up from the previous estimate of a 6 percent.

 

Britain's GDP fell by a record 5 percent last year alone, a bigger drop than the 4.75 percent decline expected by the Treasury, and far outstripping the 4 percent contraction in the Eurozone and the 2.4 percent decline in the US.

 
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