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
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
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
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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