Muted cheers as the UK limps out of recession

Today's increase in GDP of just 0.1 per cent, though welcome, falls short of the 0.3 per cent gain that was widely forecast by City economists.

Official figures released today by the Office for National Statistics (ONS) show UK GDP increased by 0.1 per cent in the final quarter of 2009. This means that the UK’s longest and deepest recession since the 1930s ended in the third quarter of last year. GDP contracted for six consecutive quarters from Q2 2008 to Q3 2009 inclusive and by a total of 6 per cent.

However, an increase in GDP of just 0.1 per cent is not much to celebrate and falls short of the 0.3 per cent gain that was widely forecast by City economists.

• Output in both the service and production industries increased by 0.1 per cent; construction output was unchanged from the third quarter.

• Manufacturing output increased by 0.4 per cent, having fallen in eight of the previous nine quarters. The Government’s car scrappage scheme probably helped, though some of the increase might simply reflect companies rebuilding inventories.

• However, the increase in manufacturing output was offset by a 3.3 per cent fall in output in the electricity, gas and water supply industries.

• Output in the distribution, hotels and restaurants sector also increased by 0.4 per cent, having increased by 0.7 per cent in the third quarter. Motor trades and retail made the largest contribution to the increase.

The prospect of the car scrappage scheme ending and VAT increasing from 15 per cent to 17½ cent from January might have temporarily boosted retail activity, and raises the possibility of a reversal of fortunes in the first quarter of 2010.

At this stage, the ONS does not give any details of what happened to consumption, investment or exports in the fourth quarter of last year. However, based on the data it has released, and on the monthly indicators, it appears that consumer spending was growing very slowly in the fourth quarter but that investment spending probably contracted.

Meanwhile, the hoped for strong recovery in exports – helped by the fall in sterling since the financial crisis broke – seems not to have happened yet, probably due to the weak nature of the economic recovery in other major economies (with the notable exception of China).

Overall, it looks like the worst of the recession is behind us – an impression confirmed by recent data on unemployment and on consumer and business confidence – but a sustainable recovery is not yet in place. Indeed, the increase in VAT in January and the end of the car scrappage scheme might mean any GDP gain in the first quarter of 2010 is also disappointing.

Until there is evidence that private demand (i.e. household consumption, company investment and overseas demand for UK exports) is strengthening, any suggestions that monetary policy should be tightened (because of higher inflation) or fiscal policy should be tightened more than the government currently plans (because of the fiscal deficit) should remain suggestions only.

The risk of action is too great.

As a final point, it should be remembered that this is only the preliminary estimate of GDP, based on around 40 per cent of the data that will be used in the final estimate. There is plenty of opportunity for growth to be revised up – or down.

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5 Responses to “Muted cheers as the UK limps out of recession”

  1. Claire Spencer

    The fact that automotive/retail contributed the most to growth is why we should put off the celebrations for now: http://bit.ly/5dSYVD

  2. UK has highest GDP per capita rise in G7 since 1997 | Left Foot Forward

    […] the economy emerged from recession, figures from the IMF – including data for 2009 – show that since 1997, Britain has had […]

  3. CrisisMaven

    “Too close to call” – 0.1% is within the margin of error, if GDP is worth believing at all: Bloom of Doom I: British Economy Creeps Out of Recession?

  4. Arthur Smith

    during the height of the economic recession, our online and offline business in the US have suffered some major drop in sales. now our sales are getting slowly back to normal.

  5. Camila Perry

    Our home business was really affected by the Economic recession, we have to cut jobs just to cover up our losses. fortunately, we have already recovered. `

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