UK’s emergence from recession confirmed

Official figures released today by the Office for National Statistics (ONS) show UK GDP increased by 0.2 per cent in the first quarter of 2010.

Official figures released today by the Office for National Statistics (ONS) show UK GDP increased by 0.2 per cent in the first quarter of 2010. This follows growth of 0.4 per cent in the final quarter of 2009 and appears to confirm the UK economy has emerged from the recession brought on by the global financial collapse in 2008, though a touch of caution is required because this preliminary estimate of GDP is only based on around 40 per cent of the data that will be used in the final estimate.

This outcome was in line with expectations. Output increased in manufacturing, business services and finance, and government services, but there were 0.7 per cent falls in the output of the construction industry and the distribution, hotels and restaurants sector.

These were the parts of the economy most badly hit by the terrible weather in January. It is likely that GDP would have increased by 0.3 or 0.4 per cent in the first quarter, if the weather had been more normal.

In the Budget, HM Treasury forecast that GDP would increase by 1¼ per cent in 2010 – a view shared by the IMF, which two days ago published its latest projections, showing UK growth would be 1.3 per cent in 2010. This requires that quarterly growth averages 0.7 per cent for the remainder of the year.

If growth is going to accelerate as expected by HM Treasury and by the IMF, then private demand (i.e. household consumption, company investment and overseas demand for UK exports) will have to strengthen because the government is no longer increasing its support for the economy.

This appears to be the most likely outcome. Surveys of business confidence, in particular, show companies are more optimistic about the economic outlook. But, the sharp fall in consumer confidence in March (back to its level of last December) shows how fragile sentiment is.

In these circumstances, any suggestion that monetary policy should be tightened because of the recent petrol price-led increase in inflation should be dismissed. Domestic inflation pressures remain very muted. Similarly, calls for a tightening of fiscal policy in 2010, whether through so-called ‘efficiency savings’ or by any other means, are premature.

A recent paper from the UK’s Progressive Economics Panel argues that such a move would lead to job losses, which would further dent consumer confidence and make it very hard for growth to accelerate. There is even a chance that it could tip the economy back into recession. The time for policy tightening is when the recovery is secure – after we have seen some quarters of 0.7 per cent growth, not while they remain forecasts.

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