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Ernst & Young UK Seeing A Fragile Recovery For The UK Economy

Ernst & Young UK Seeing A Fragile Recovery For The UK Economy

Rob Starr,
July 14, 2010

The recovery from the worst worldwide recession in the last 6o years has left the domestic side of the UK’s economy more vulnerable than first expected, according to official statisticians and Ernst & Young UK. The general consensus is that the country entered recession in Q4-2008 and was out of it in Q4-2009. But it is the growth in the quarters following the end of the recession are that much more critical.

This new information has even led analysts in general and a key person at Ernst and Young’s ITEM club to speculate that the recovery itself hasn’t been as robust as was previously thought, given that the UK economy only grew 0.3% in the first quarter of the year 2010.

"The domestic side of the economy looks very vulnerable," said Hetal Mehta, chief economist for Ernst & Young’s ITEM Club.

So it’s time to take another look at the numbers that were first reported:

• First quarter 2010 GDP was worse off than first reported. From the peak to the trough, it fell 6.4 % during the recession. That’s an appreciable difference from the 6.2 % that was first reported.
• Figures that were released Monday also show a discrepancy in the numbers for government spending during the recovery. They were reported to have risen by half a percent in the first quarter of the recession when it fact the accurate number is 1.5% . This means the government’s influence on GDP creation was much higher than originally estimates, which would indicate that the impact of the consumer and investment was lower by that same amount
• Finally, consumer spending fell in the forth quarter and that doesn’t bode well for the recovery.

"The fact that sterling’s significant depreciation has so far failed to boost net trade is worrying. And since the eurozone has plunged back into turmoil, and global growth may be slowing down, there are increasing risks to U.K. export demand," said Mehta, who nonetheless expected second-quarter growth to accelerate to 0.5 percent or better.

Still Ernst And Young’s Mehta sees both sides of the issue and had both positive and negatives opinions for at least the immediate future. The dual threats to UK exports demands that come in the guise of turmoil in Eurozone countries and the general slowdown in global growth are worrisome, but Mehta still sees second quarter growth to be at 0.5 % or better, not the greatest but certainly enough to ward off negative thoughts on a double-dip recession.

The British Chambers of Commerce’s latest Economic Survey suggest that the UK economy saw further growth in the Q2-2010, building on the improvement in the first three months of the year. Business conditions, such as employment expectations, investment plans, export orders, and domestic sales – in both the manufacturing and service sectors – made gains in Q2. But there are still underlying weaknesses in the economy, which cannot be ignored if the country is to avoid a relapse into recession. Sluggish growth in the service sector is a serious concern, and a huge number of manufacturers (around 80%) are now reporting that the cost of raw materials is increasing, adding to price pressures.

So while the BCC did not specify a GDP growth figure, there is a general feeling among economists and analysts that the economic recovery is fragile and still dependent on several unstable factors at the present time, the view to which E&Y also appears to concur.

Ernst and Young, UK, Recession, Recovery, ITEM Club, GDP Growth, Q2-2010

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