UK faces 'double-dip' recession

Dipped teabag

Weak sales on the high street during January have led to fears that the UK could experience a ‘double-dip’ recession with economic growth turning negative again in the first quarter.

The UK officially exited the recession in the final three months of 2009, on the back of growth of just 0.1%.

Despite retailers reporting an uplift in sales during December, the latest figures show that sales in January were the worst for 15 years. The British Retail Consortium reports that UK retail sales values fell 0.7% on a like-for-like basis from January 2009, when sales rose by 1.1%.

Although the snow boosted food sales in the first week of January, with households stocking up on essentials, non-food sales and particularly discretionary items took a hit.

Meanwhile, as the weather improved, food sales slowed but non-food staged only partial recovery. Over the month, food, clothing and footwear showed gains on a year ago, but homewares and furniture showed declines.

“An awful start to the year and in stark contrast to an upbeat December,” says Stephen Robertson, director general of the British Retail Consortium. “This is the worst January growth in total sales in the 15 years we’ve been running the survey.”

He says the return of VAT to a rate of 17.5% on 1 January had a big impact on sales.

“The VAT change brought some sales forward to December, but customers are becoming cautious again in the face of economic and political uncertainty,” Robertson explains. “Retailers will be hoping these results are mainly a snow induced blip, rather than an indication of further difficulties.”

Fragile economy

The poor performance on the high street has heightened fears that the UK could experience a double-dip recession.

Howard Archer, chief UK and European economist at IHS Global Insight, says the improved weather should help to make up some of the losses in retail sales during January, as consumers tend to delay purchases rather than cancel them altogether.

However, he adds: “Weak retail sales in January reinforce concerns that the UK economy could suffer a ‘double dip’ in the early months of 2010 after only crawling out of recession in the fourth quarter of 2009 as some of the temporary factors that have been supporting activity are removed - notably the cut in VAT from 17.5% to 15%, which was reversed in January, and the car scrappage scheme, which will end by March.”

Consumer spending will remain limited in 2010, Archer says, because household budgets are still be squeezed by rising costs, including utility bills, and the potential for tax hikes.

A lack of affordable credit, combined with high unemployment, low earnings growth and high debt levels, will also impact how much people are able – and willing – to spend.

Helen Dickinson, head of retail at KPMG, is also not confident about the outlook for retail sales. “The underlying trend is difficult to read but there is no doubt that the strong sales we saw in December 2009 are not indicative of the trend for the rest of this year,” she says.

Although there remains a risk of a double-dip recession, the UK is broadly expected to experience positive growth during 2010 as a whole. However, growth is expected to be weak.

Vicky Redwood, senior UK economist, at Capital Economics, says: "It remains hard to see how this economic recovery can continue to gain momentum once the short-term boosts from the inventory cycle and the last of the fiscal stimulus have faded. We still expect economic growth of just 1% or so this year."

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