UK still in recession
The UK remains the only developed country yet to emerge from recession, despite new figures showing the economy is in slightly better shape than previously thought.
Revised figures show the economy shrunk by 0.2% rather than 0.4% in the third quarter. Despite this improved revision, economists were hoping for a stronger performance, with many forecasting a 0.1% contraction.
The Office of National Statistics, which publishes the figure, says a sharp upgrade to construction output, driven by strong growth in public sector projects and the slowing rate of decline in the housebuilding sector, helped lift the figure. However, this was slightly offset by weaker services and industrial production output during the period.
The UK economy has now been shrinking for six consecutive quarters. It is lagging behind other Western countries in the pace of recovery and is the only developed country yet to emerge from recession.
Jonathan Loynes, chief European economist at Capital Economics, says: “The UK still looks weak compared to its major competitors. However, the details of the third quarter economic figures perhaps contained some encouragement regarding the prospects for further growth.”
Loynes believes that the sharp rise in household saving is positive news, as is the news that consumer spending actually edged up for the first time since the first quarter of 2008. Investment and exports were also revised up.
However, Howard Archer, chief UK economist at IHS Global Insight, warns: “The UK economy is by no means fully out of the woods and still faces a very challenging economic and financial environment.”
He argues that the return of VAT to 17.5%, rising unemployment, ongoing tight credit conditions and the end of the car scrappage scheme - along with major fiscal tightening next year- will subdue the economic recovery.
Archer expects the economy will contract by around 4.5% overall this year and will struggle to grow more than 1% next year.
Loynes forecasts the economy to grow by around 1% in 2010.
Invented by a Frenchman in 1954 and ironically introduced in the UK on 1 April 1973, VAT is an indirect tax levied on the value added in the production of goods and services, from primary production to final consumption and is paid by the buyer. Its levying is complex, with a number of exemptions and exclusions. For example, in the UK, VAT is payable on chocolate-covered biscuits, but not on chocolate-covered cakes and the non-VAT status of McVitie’s Jaffa Cakes was challenged in a UK court case to determine whether Jaffa Cake was a cake or a biscuit. The judge ruled that the Jaffa Cake is a cake, McVitie’s won the case and VAT is not paid on Jaffa Cakes in the UK.