UK Economy Makes Gains But New Problems Emerge

The UK economy grew by 0.5 percent for the first quarter of 2011 according to the latest figures to be released by the Office for National Statistics. While not spectacular by any stretch of the imagination, the return to positive growth after six months of negative growth may bring the end of talk of a “double dip” recession for the beleaguered economy.

The ONS did caution that the GDP calculation is still preliminary and there will be two revisions in the next month or so, but the feeling on the street is that the 0.5 percent reported yesterday is a “worst case” scenario.

One area that appears ripe for revision is the 4.7 percent decline in the construction sector. Weather aside, it is difficult to pinpoint a reason for such a dramatic decline. This is even more suspect considering the 1.1 percent growth in Manufacturing and a similar increase in the Services sector. Also, the published GDP figure is considerably less than the projected 0.8 percent put forward by the Treasury’s Office for Budget Responsibility tasked with providing an independent review of public finances and the overall economy.

Inflation and Austerity to Be Factors

If sustained growth has indeed returned to the British economy, the spotlight will now focus even more sharply on inflation and to a lesser degree, the impact of the scheduled government spending cuts.

Unless the GDP figure is revised sharply upwards, first quarter growth is considerably less than the Bank of England and indeed the government predicted and this could have two important implications. Firstly, weaker growth means lower tax revenues for the government and this could throw a spanner into the works making it more difficult for the government to meet its budget “austerity” targets.

Secondly, the weaker-than-expected growth could force the Bank of England to delay interest rate hikes until the economy gains more traction. This is a bit of a worry as price inflation is on the rise in the UK and at last count, was clipping along at an annualized rate of 4 percent.

On the other side of the coin however, there is an argument that the recent spike in energy costs are largely responsible for the price increases which, when combined with a weak currency, drives the cost of energy higher. So long as “core” inflation remains acceptable, the need for an interest rate increase becomes less urgent.

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