Outlook for economy improves

28 August 2009

The UK economy fared better during the spring months than previously thought, thanks to better-than-expected output from the manufacturing, energy and motor sectors. 

GDP - the measure of economic health - between April and June fell by 0.7% rather than the 0.8% initially estimated, according to new figures published today by the Office for National Statistics. This means that the annual economic decline has been revised to 5.5% from 5.6%.

Although the figures show a significant improvement compared to the first quarter, many sectors of the British economy continue to struggle. Construction output suffered its biggest annual fall since records began in 1948, while the fall in annual services sector output was the biggest since records began in 1955.

Vicky Redwood, UK economist at Capital Economics, says the slight upward revision is “pretty insignificant”.

She adds: “The falls in consumer spending and investment were smaller than in the first quarter – but were falls nonetheless, with the 0.7% drop in consumer spending showing that weak spending off the high street is more than offsetting the strength of retail sales.
“With tax rises looming, the labour market weakening and credit conditions still, any recovery in private sector demand will be weak. We continue to expect a pretty minimal rise in GDP next year,” she added.
Yesterday, revised figures revealed that the US economy shrank by 1% in the second quarter of the year. The drop marks a record four consecutive quarters of decline although it was far smaller than the previous two quarters.
It was also an improvement on the 1.5% decline that economists had been expecting. They are now predicting a return to growth in the third quarter.
Paul Ashworth, analyst at Capital Economics, says: "The incoming monthly data, particularly from the industrial and housing sectors, suggests that [US] GDP will post a gain of between 1.5% and 2.5% in the third quarter, thanks to the slower pace of inventory liquidation, strong government spending, a rebound in exports and possibly even a turnaround in investment."
However, he also warns that credit restrictions and high unemployment mean the expected rebound will take longer to develop into a sustainable recovery.
France, Germany and Japan have all now emerged from recession.

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