UK economy to grow sooner

Reuters

GROWTH EXPECTED: The UK economy will shrink more this year than previously thought but it will grow very modestly in the current quarter.

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The economy will shrink more this year than previously thought but it will grow very modestly in the current quarter, sooner than was expected just a month ago.

A median of around 40 economists in the survey, taken over the past week, showed the economy contracting by 4.1 percent this year as a whole, compared to 3.9 percent forecast last month, but is better than the 4.4 percent contraction forecast for the euro zone.

The economy is now expected to grow by just 0.1 percent in the third quarter, three months earlier than in a June poll, and will then witness 0.8 percent growth in 2010, revised up from the 0.5 percent predicted in June.

"A policy-induced, inventory-led rebound appears to be under way," said Andrew Brigden at Fathom Consulting, who has significantly revised up his forecasts since last month.

The Bank of England unveiled unprecedented plans earlier this year to purchase up to £150 billion of government bonds, effectively printing money, to boost an economy in the throes of a deep recession.

However uncertainty remains with forecasts ranging from a 3.4 to 4.8 percent contraction for 2009 and between 0.7 percent contraction and 1.9 percent growth for 2010, slightly wider than in last month's poll.

Revised data at the end of June showed the British economy shrank 2.4 percent in the first three months of 2009 - its fastest pace in more than 50 years - and comes after a 0.7 percent expansion in 2008 and growth of 3.0 percent in 2007.

But economists say the worst may be past.

"Forward-looking indicators, like private business surveys, suggest that the end of the recession is in sight," said Azad Zangana at Schroders Investment Management.

The UK's dominant service sector expanded for a second month in June with the business confidence index hitting its highest level in almost two years, according to the closely watched Purchasing Managers Index.

Accountancy firm Ernst & Young said this week profit warnings by British firms were down 36 percent in the second quarter from a year ago, falling to a 6-year low.

The FTSE index of leading shares has rallied over 20 percent in recent months, having crashed over 30 percent last year, and is seen regaining more lost ground as the year goes on.

Meanwhile data released on Tuesday showed retail sales rose 1.4 percent in June while the house prices, a bedrock of consumer wealth, fell at their slowest rate in two years.

Business Minister, Peter Mandelson, said on Tuesday the recession in Britain was coming to an end but that the consequences would last for some time.

Figures unveiled earlier on Wednesday showed unemployment rose to 7.6 percent in May, a level not seen since January 1997, as firms continue to slash jobs in a bid to cut costs and stay afloat, but forecasters see it averaging 9.6 percent in 2010.

RATES UNMOVED

The Monetary Policy Committee have hacked 450 basis points from rates since October in a battle to invigorate the economy and median forecasts show them on hold until next July at least.

This is in line with a poll last week, which also showed the central bank would increase its government bond purchase programme to a total of £150 billion when it meets in August.

"We do not expect interest rates to start rising until the second half of 2010, assuming there is clear evidence by then of a sustained recovery in the economy," said John Hawksworth at PricewaterhouseCoopers.

Inflation fell below the central bank's two percent target for the first time in almost two years in June, sinking to 1.8 percent from 2.2 percent in May, and after peaking at 5.2 percent last September.

Inflation is seen averaging 1.8 percent this year and dropping to 1.5 percent in 2010, but economists were evenly split on issue of whether inflation or deflation posed the biggest threat.

- Reuters