A New Year Overview

Just when we might have hoped that the worst was over, official figures suggest that the UK economy is far from out of the woods. Despite anecdotal evidence of a resurgent high street over the Christmas period, the fact of the matter is that UK economic activity shrank by 0.2% in the last three months of last year. It marks a sharp drop in economic activity from the third quarter of 2011, when gross domestic product (GDP) expanded by 0.6%. The whole year figures hardly make better reading with ONS data showing that the economy grew by just 0.9% during 2011. It would appear that the British recovery, which has been stalling since the government’s spending review in the autumn of 2010, may now have gone into reverse. The question remains though, “Are we still climbing uncertainly out of the 2008-9 recession, or heading for a new one?” The quarterly fall of 0.2% in GDP is the first since the last three months of 2010, when freezing weather was blamed for a 0.5% drop. The recent figure was worse than had been feared, as most economists had pencilled in just a 0.1% fall in activity. The contraction appears to have been driven by a 0.9% fall in manufacturing, a 4.1% drop in electricity and gas production as the warm weather caused people to turn down heating, and a 0.5% fall in construction sector. Meanwhile, the services sector (which accounts for two-thirds of the economy) ground to a halt. November's public sector strikes, which took place in the fourth quarter period, losing nearly a million working days, may also have held the economy back. Only last week, the International Monetary Fund cut the growth forecast for the UK economy in 2012 from 1.6% to 0.6%. Of course something similar in the current period, January to March, would technically take the economy back into recession. Politically that would be a big problem for the Chancellor although figures suggest that both Germany and France may have fared worse in the fourth quarter of last year. A flat economy will not generate the job creation needed to bring down unemployment. 2012 could well be another hard slog for workers and businesses. The Eurozone is the swing factor, with a further escalation of the crisis likely to the single biggest threat to the UK economy, while an improvement there could lead to a revival of both business and consumer confidence. Graeme Leach, the chief economist at the Institute of Directors, said: "The tightrope walk between recession and recovery continues. We've taken one step towards a double-dip recession, and it's now probably 50-50 as to whether we'll take the second, with a fall in output this quarter as well. It's important to stress that the 0.2% fall in GDP is not large and could be reversed as QE2 works through the economy.” The figure is in line with a recent Federation of Small Businesses survey which showed that confidence among small businesses plummeted in Q4, recording a score of -24.5, a fall of some 15 points from the previous quarter.There was however, better news on the inflation front with a fall in both measures on the back of lower fuel and clothing prices. Consumer Prices Index (CPI) inflation in the UK fell to 4.2% in December, down from 4.8% in November. Retail Prices Index (RPI) inflation fell to 4.8% from 5.2%. It backs the Bank of England’s predictions that inflation will be 2% by late 2012. The drop in the CPI rate was the biggest monthly fall since April 2009, and the lowest rate since June 2011. The figures reflected a 2.8% drop in the price of clothing and footwear as retailers cut prices to attract customers in the run-up to Christmas. Fuel prices fell 0.6% on the month, although this month's gas and electricity cuts by the main suppliers have yet to take effect. However, food prices rose by 1.4%, despite recent fierce competition between the main supermarket chains. Marchel Alexandrovich, analyst at Jefferies International, said: "The figure was bang in line with expectations. This is the beginning of a downward trend that will see inflation fall back towards 3% by springtime as the VAT rise drops out and energy prices fall." On the jobs front, UK unemployment rose by 118,000 in the three months to November to 2.69 million, official figures show. The Office for National Statistics (ONS) said the unemployment rate also rose to 8.4% from 8.3%, the highest since January 1996. The number of people claiming Jobseeker's Allowance in December rose by 1,200 to 1.6 million. The number of young people looking for work hit a new record of 1.043m, taking the rate for 16-24 year-olds to 22.3%. The number of people in employment rose slightly in the three months to November by 18,000 to 29.12 million. The figures support the picture of a flat UK economy, with other data showing average weekly earnings, including bonuses, grew at just 1.9%. The figures showed the private sector was not compensating for job losses in the public sector, with the private sector creating 5,000 in the period, while 67,000 public sector jobs were lost. Since the period covered by the latest ONS figures, there have been a number of job loss announcements from retailers and banks, and the government's public sector cuts programme is continuing. The figures also showed a large rise in the number of self-employed people. A rise of 101,000 took the total to a new record of 4.2m. The ONS said the number of employees and self-employed people working part-time because they could not find a full-time job had risen 44,000 to 1.31m, the highest figure since records began in 1992.