The UK economy slipped back into a technical recession in the latter part of 2011. Real gross domestic product contracted by a further 0.3% in the first quarter of this year following a 0.3% decline in the fourth quarter of 2011. This left the level of output some 4% below its prior 2008 recession peak. The recent downgrading by the International Monetary Fund of the UK's growth forecasts (down from 0.8% to 0.2% this year and 2.0% to 1.4% next year) is a further warning sign that economic recovery will not be swift.
The main drags on the domestic economy continue to be the ongoing severe squeeze on real household incomes (which in turn adversely impacts on consumer spending), deleveraging in the private sector (with households and non-financial corporations having started to reduce their debts) and exposures to the European economic and financial crisis. The impact on the UK of problems in the eurozone are from reduced trade, increased bank funding costs as the crisis has intensified and a fall in private sector confidence. It will take time for the financial sector and credit conditions to normalise.
Support for the economy comes from the ultra-loose monetary policy employed by the central bank and a large depreciation of sterling in recent years. The prospect of a further period of soft economic activities points to a growing need for additional policy measures by the authorities.
Lending to private non-financial companies continues to be sluggish, while borrowing rates on mortgages and loans have risen. The Monetary Policy Committee's preferred measure of M4 money supply has continued to decline and is significantly below its peak in 2009. The other important effect of the current uncertain climate has been to dampen confidence among businesses and households.
Despite the depth of the recession over the last four years, the number of corporate failures through liquidations and administrations has fallen rapidly from the initial peaks of 2008/09. The levels of failures are now on a par with the comparative economic boom times of the early 2000s.
The reasons for the rapid reduction in failures are numerous: low interest rates, high levels of support from banks to struggling businesses, the time-to-pay scheme operated by HMRC and businesses generally adjusting to a new, lower, level of economic activity.
Despite government cutbacks, our national debt is continuing to rise unabated and by 2015/16 will have risen by 59% over the level in 2010/11 to £1.4 trillion. With the UK dependant on its international credit rating to suppress the interest rates charged on our national borrowings, there are difficult economic questions over whether to reduce the cuts in government expenditure or not.
With a backdrop of slowing global growth, further questions are likely to be asked over the Chancellor's austerity drive if the public sector net borrowing position deteriorates further and, moreover, growth continues to flat-line. We still believe that more creative growth policies from the Coalition Government might be needed if the economy is to gain greater traction in its recovery from the financial crisis.
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