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The UK’s preliminary Q4 2010 real GDP figures reveal a 0.5% contraction from the previous quarter signalling a faltering economic recovery. The economy will remain under pressure in 2011 as consumers in particular face a difficult year as the effects of government austerity measures take hold, while rising inflation is squeezing disposable incomes across the board.
According to national statistics, the Q4 2010 GDP contraction of 0.5% q-o-q (seasonally adjusted) was a result of the bad weather in December 2010 when the UK ground to a halt amid freezing conditions. However, the figures are particularly significant because of the fact that this contraction was before the government’s austerity measures came into force and so was largely unexpected. If Q1 2011 GDP figures show another quarter-on-quarter GDP (q-o-q) contraction, then the UK economy will officially have experienced a “double-dip recession”, the first major world economy to do so.
|q-o-q growth, seasonally adjusted|
Source: Euromonitor International from national statistics
The latest figures come following earlier gloomy news about the state of the UK economy as annual inflation measured by the Consumer price index in December 2010 reached its highest rate for 25 months. These factors combined will weigh further on consumer confidence and spending prospects, which are already expected to be weak in 2011 as a result of government austerity measures implemented to reduce the UK general government budget deficit. Consumer expenditure in the UK accounted for 60.9% of GDP in 2010 so any downturn in spending will act as a further drag on economic growth:
It is important to note that the latest GDP figures are preliminary estimates and could be revised but they are important as they reveal that the recovery is more fragile than initially anticipated despite unprecedented government stimulus measures since 2008. Euromonitor International forecasts that per capita consumer expenditure in the UK will grow by just 1.0% annually in real terms in 2011 and will remain subdued into the medium term. Real GDP is projected at just 2.0% growth in 2011 although this could be revised downwards.
The Bank of England will likely delay raising interest rates from record lows following the latest economic indicators, particularly as other major economies such as the USA are still pushing through significant stimulus to avoid further downturns. Furthermore, any rise in interest rates will hit consumers harder as debt repayments especially for mortgages will become more expensive. However, inflationary pressures are set to continue throughout 2011 as upward pressure persists on global commodity prices, meaning a difficult year ahead for the UK economy.