British economy faces fragile recovery: UK think-tank

Britain would face a fragile recovery with the economy growing only 1.3 percent and 1.5 percent in 2010 and 2011 respectively, according to the latest economic review released by the National Institute of Economic and Social Research (NIESR), a British think-tank.

The economy was poised to resume growth in the fourth quarter of this year, but the recovery would be feeble because consumer spending, the usual mainstay of demand, would continue to fall by 0.7 percent in 2010, NIESR said.

The recovery of Britain would not be driven by consumer spending, Ray Barrell, a NIESR economist said.

He predicted that consumer spending would continue to fall in 2011, though only by 0.1 percent, as households continue to save more. The saving ratio would reach 8.2 percent of disposable income in 2011, up from 1.7 percent in 2008. Business investment would fall again, by 6.9 percent in 2010 after its drop of 18.2 percent this year.

Thus, NIESR expected the British gross domestic product (GDP) to contract 4.4 percent this year as a result of declines in household expenditure, private investment and inventories. While recoveries in all these sectors were expected in 2010, the return to positive growth would be determined mainly by the inventory cycle and net trade.

The NIESR said that the recovery in Britain would be underpinned by net trade, which would contribute 1 and 1.4 percentage points of GDP growth in 2010 and 2011 respectively. The shift in the economy away from domestic demand and toward exports was long overdue.

Though net trade would help balance the British economy, greater dependence on exports would make shrinking the public sector deficit more difficult, because exports generated less tax revenue than domestic expenditures, Barrell explained. British current account would move into surplus over the next decades.

Britain faced a structural budget deficit of 6 percent of GDP, and the build-up of government debt, which may reach 93 percent of GDP by 2015, would leave a burden for the coming generations, Barrell added.

According to figures released by the Office for National Statistics on Tuesday, Britain's public sector net borrowing reached 14.8 billion pounds (24.1 billion U.S. dollars) in September. This was a record high for September and almost doubled the 8.7 billion pounds (about 14.3 billion dollars) in the same month last year. The overall debt of the British government now stood at 824.8 billion pounds (1352.7 billion dollars), or 59 percent of Britain's GDP.

Given the serious situation and a weak recovery, NIESR predicted that unemployment would rise to 3 million by 2011 with a downward pressure on income growth.

NIESR believed that any further extensions should be biased toward the purchase of corporate paper, rather than the purchase of government debt, in order to reduce financial stress in the business sector.

Till now, the Bank of England has extended its "quantitative easing" (QE) policy to 175 billion pounds (287 billion dollars). NIESR said that the QE would be expanded if the recovery is weaker than expected. In the coming months, the central bank would continue to maintain a low interest rate in order to ensure recovery.

NIESR predicted that inflation in the UK would remain below the2 percent target level for the next couple of years. In Britain, the consumer price index (CPI) fell to an annual rate of 1.1 percent in September, the lowest level in the last five years.

Source:Xinhua