UK GDP to weaken in short term, begin to grow in 2013, 2014 – Bank

16 November 2011 12:22  [Source: ICIS news]

LONDON (ICIS)--UK GDP looks set to weaken in the fourth quarter of 2011, as global demand slows and concerns about the solvency of certain eurozone governments intensify, increasing the strains on financial markets, the Bank of England said on Wednesday.

However, thereafter, the recovery should gain traction and gather pace in 2013 and 2014, supported by continued monetary stimulus and a recovery in real incomes, it said.

The bank said that the implementation of an effective policy response in the eurozone would help reduce uncertainty and support UK growth, “but its absence poses the single biggest risk to the domestic recovery”.

Forecasts were made assuming that the Bank of England’s interest rate follows a path implied by market interest rates and its asset purchase programme remains at £275bn (€320bn), it said.

“The marked deterioration in the external environment, together with the domestic headwinds stemming from the fiscal consolidation and squeeze on households’ real incomes, means that growth looks set to be weak in the near term,” the Bank of England said.

“The recovery is likely to gather pace over the second and third years [2013 and 2014] of the forecast as private demand picks up, supported by continuing stimulus from monetary policy and a gentle recovery in real incomes,” it added.

The report also said that the UK’s consumer prices index inflation measure, which rose to 5.2% in September, is likely to fall sharply through 2012 as the contributions of VAT (value added tax), energy and import prices fall, and downward pressure from slack in the labour market persists.

On 1 November, the Office for National Statistics (ONS) said the UK economy grew by 0.5% during the third quarter of 2011 driven by strength in the services and production sectors. The UK GDP growth of 0.5% compared with a 0.1% increase in the previous quarter, the statistics body said.

Total production output grew by 0.5% in the third quarter, compared with a 1.2% fall in the second quarter, the ONS added.

On Tuesday, official statistics agency Eurostat reported that third-quarter GDP rose by 0.2% in both the eurozone and the EU from the previous three-month period, according to initial estimates.

(€1 = £0.86)

By: Franco Capaldo
+44 (0)20 8652 3214

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