BRITAIN’S INITIAL recovery from recession has been sluggish compared with other developed nations, but stronger growth next year should help it narrow the gap.
With the British economy on track to shrink 4.5 per cent this year, the consensus forecast is for a rebound of 1.4 per cent in 2010, according to Consensus Economics, which publishes a range of City of London and academic projections each month.
The growth forecasts range from a high of 2 per cent to a low of 0.7 per cent, suggesting little optimism that the recovery will be vigorous.
The UK also looks likely to lag behind the recovery in the US, where the consensus forecast suggests growth of 2.7 per cent. The US could trail Germany and France, however, where expansion of 1.7 per cent and 1.5 per cent respectively is expected.
Growth is forecast to be weak in Italy next year, at 0.9 per cent, while Spain’s economy is expected to shrink 0.4 per cent, weighing on the overall euro zone, where expansion of 1.3 per cent is projected for 2010.
The sharp fall in the value of the pound will help UK exporters, with sterling’s trade-weighted index down 23 per cent over the past three years.
However, the improvement in export competitiveness looks likely to translate into a relatively modest improvement in the UK’s current account deficit, from £29.4 billion in 2009 to £25 billion in 2010.
The recovery in the UK’s manufacturing sector, projected at 2.1 per cent for next year, is forecast to be slower than that in the US, Japan, Germany or France.
UK investment spending is expected to fall 2.1 per cent in 2010 after dropping about 14.5 per cent this year – a further disappointing prognosis compared with competitors.
Restoring the financial services industry to health is a crucial issue for the UK, given the sector’s contribution to employment, profits and taxation.
Kevin Gaynor, chief markets economist at the Royal Bank of Scotland (RBS), likens the crisis in the banking sector to an oil shock because virtually every consumer and company uses banking services just as everyone needs energy.
RBS says a persistent problem in the banking sector can translate into problems across all economic sectors, graded by the dependency of each industry on banking.
Mr Gaynor warns that a spike in real bond yields would be the single biggest threat to economic healing, since this would slow the process of repairing balance sheets and re-ignite concerns about a sovereign default.
With gross government bond issuance in the UK set to reach £225 billion in 2009-10, the threat of a downgrade to the UK’s triple A credit rating is unlikely to be withdrawn.
– (Copyright The Financial Times Limited 2009)
