UK: Deloitte Monday Briefing: UK On The Mend, Slowly

Last Updated: 1 October 2012
Article by Ian Stewart

Most Read Contributor in UK, August 2017

* The front cover of this week's Economist magazine is entitled, "Heading out of the storm: better news for the UK economy". The Economist goes on to say that, "The British economy is coming out of recession, and is stronger than almost everyone believes".

* Such claims are perhaps less surprising than they appear. All 37 independent forecasting groups which provide GDP forecasts to the Treasury expect UK growth to bounce back in 2013. Most believe that the UK's double dip recession is drawing to an end and that growth will resume in the first quarter of next year.

* The crux of the Economist's argument is that the UK consumer, having suffered a terrific battering in the last 4 years is turning the corner. The majority of economists take the same view, and with good reason.

* Most of the big tax rises are past. Sharply lower inflation - CPI inflation has almost halved in the last year to 2.5% - should lend additional support to consumer spending power. Meanwhile the labour market has remained unexpectedly strong, with employment rising over the last three years as job growth in the private sector has outstripped public sector job losses.

* These factors are supporting consumer spending power. Real disposable incomes have risen 1.7% over the last year having declined through 2011. And consumer spending is rising once again. Given that consumer spending accounts for over 60% of the UK economy an upturn in consumer activity should lend significant support to growth next year.

* So the Economist's view that the worst is probably passed for the UK are not particularly radical.

* In our view the real test is whether the longer-term outlook for growth is getting better or worse. The news here is not encouraging. Average or consensus forecasts for UK GDP growth for 2013 have dropped from 1.8% to 1.3% in the last four months. 1.3% is a pretty weak rate of growth for an economy used to growing at 2.5% a year. Our guess is that most economists would say that the risks to their growth forecasts lie on downside.

* Much of the problem lies outside the UK. Last week the euro crisis moved back centre stage. Hopes that the recently announced bond buying programme by the European Central Bank would crack the euro's problems have dissipated. Meanwhile the US is on course for sharp tax hikes and cuts in public spending in three months time. Unless politicians strike a post-election deal the so-called fiscal cliff could derail America's recovery. Such external uncertainties constitute a significant drag on a UK recovery which is widely expected to be powered by demand from abroad for British exports.

* The third quarter CFO Survey, due to be released next Monday, provides a fascinating insight into how big corporates are responding to this world of heightened uncertainty.

* The UK's double dip recession seems to be drawing to an end. Growth should pick up next year. But, as events in Europe remind us, plenty of things could go wrong. For now we seem to be heading for a shaky, tepid recovery.


The FTSE ended the week down 1.9% over fears about growth and the pace of fiscal adjustment in the euro area.

Here are some recent news stories that caught our eye as reflecting key economic themes:


* from 1st October for the first time all UK workers earning above a certain pay level will be required to save a portion of their earnings towards a pension unless they elect to opt out - savings culture

* European Central Bank President Mario Draghi said that EU governments, not the central bank, must take "fundamental" measures to solve the region's debt crisis - euro crisis response

* Emigration from Ireland has reached the highest level in 25 years - austerity

* The Spanish government unveiled ,¬40bn of new austerity measures, seeking to cut government spending in 2013 by 8.9% - Spain

* The French government unveiled a budget aiming to cut the public deficit to 3% of economic output in 2013, via tax rises for high earners and a freeze on spending - France

* Thousands of Greek workers began a general strike in protest against government austerity measures - Greece

* French prime minister Jean-Marc Ayrault, warned that a Greek exit from the eurozone could be "the beginning of the end of the European project" - euro crisis politics

* German private sector business confidence fell for the fifth consecutive month in September, recording its lowest reading since February 2010, according to data from the Ifo Institute - slowdown

* UK lending to nonfinancial firms fell by Ł1.5bn in August compared with July, according to data from the British Bankers' Association - bank lending

* Global issuance of high-yield corporate bonds rose by an annual rate of almost 300% in Q3 2012 according to Thomson Reuters data, driven by record low interest rates for corporate "junk" bonds - search for returns

* Japanese prime minister Yoshihiko Noda, promised to meet a pledge to end deflation within a year "at all costs" - Japan

* The Chinese central bank injected Rmb365bn ($58bn) into the financial system, the largest weekly amount in history, in an attempt to prevent a rise in borrowing costs - quantitative easing

* The average wealth of the China's 1000 richest people has fallen 9% since 2011, according to the 2012 Hurun Rich List, with those in the solar and textile sectors the hardest hit - emerging markets

* Tesco announced plans to boost its internet sales presence by building a national network of "dark stores", which are not open to the public but are used to assist conventional stores when staff need extra help to meet online demand - digital revolution

* Demand for coffee fell to a 6 year low in Italy in 2011 as households cut back on consumption, according to the International Coffee Organisation - bitter taste

* The Australian Bureau of Statistics "found" a previously unrecognized A$325bn ($338bn) in share assets on the national household accounts, theoretically increasing the wealth of every Australian citizen by A$14,380 at the end of March 2012 - boomerang money

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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