UK Economy Turns A Corner


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Is the worst of the economic downturn behind the UK? The Organisation for Economic Co-Operation and Development (OECD) said on 9th April that the UK economic may have turned a corner

Is the worst of the economic downturn behind the UK? The Organisation for Economic Co-Operation and Development (OECD) said on 9th April that the UK economic may have turned a corner and appeared to be on the road to recovery.

Its composite leading indicator (CLI) for Britain, which is designed to show early signs of economic recovery or slowdown, was the most upbeat for months. OECD?s CLIs have a strong track record of predicting the economy six months in advance.

According to the OECD, Britain is showing ?signs of a positive change in momentum?. It is on course to experience a tentative pick up in the next six months.

The Paris based think-tank does however warn that the recovery will be fragile and growth will be below trend for a while. While the indictors are encouraging, the signs of recovery are weaker than they could be. Nonetheless, since just two weeks earlier it had suggested that the UK was in recession, this latest assessment suggests the situation is improving in the UK.

The Eurozone is also turning a corner, although there is growing divergence in the region. Economic activity in Germany is showing positive signs, but remains sluggish in France and Italy. Spain?s borrowing costs are edging higher which is causing concern.

Germany, the Eurozone?s biggest economy, saw exports rise for the second month in a row in February, defying expectations of a drop. Exports to non-Eurozone countries increased by 9.7% and to countries outside Europe by 13.4%. Exports within the Euro area were a more modest 3.3%.

Outside Europe, the US and Japan continue to show signs of regained momentum and drive the global recovery.

The leading emerging markets, Brazil, Russia, India and particularly China all improved. China recorded a trade surplus of $5.35 billion in March, a welcome and unexpected improvement after February?s deficit. Exports rose 8.9% rose for the year to March. On the downside import data was weak. Imports only grew by 5.3%, potentially a sign that domestic demand is slowing.

The OECD?s more positive outlook for the UK economy followed other optimistic signs at the beginning of April.

Halifax?s index of house prices showed property values rose by 2.2% in March, the largest monthly increase in almost three years.

According to the Markit/CIPS survey, the dominant services sector, which accounts for around 75% of the UK economy, posted its strongest quarterly growth in almost two years, expanding by 0.7%.

Service sector employment (covering jobs from banking to retail) rose at its fastest rate for four years over the first quarter of the year.

Companies reported an increase in volumes of new business, and were also getting more business from existing clients.

However, Markit warned that this is not a ?run-away recovery?. Job creation and inflows of new business are still well below those seen before the financial crisis.

PMI (purchasing managers index) surveys measure the confidence and activity of business purchasing managers.

The manufacturing and services PMIs were all much stronger than expected, and construction recorded its best numbers in close to three years.

After reviewing the PMI data, the senior economic adviser of the Ernst & Young Item Club, Andrew Goodwin, said on 4th April:

?What is even more encouraging is the firm pick-up in new business and the increased level of enquires, which suggests that this upturn has legs. We appear to be seeing an improvement in business-to-business spending in particular, which seems to be a result of greater corporate confidence. Many firms put their spending plans on hold at the back end of last year, because of concerns over the escalation of the Eurozone crisis and its impact on growth prospects. However, central bank policy action and greater stability in financial markets have helped to support confidence and firms now appear to be revisiting these plans.?

He did however advise that the UK is still in for a bumpy rise over the first half of the year, and the additional Bank Holiday for the Queen?s Diamond Jubilee in June will affect second quarter results.

The Ernst & Young Item Club expect the economy to have grown by 0.3% in the first quarter, fully reversing the decline in the last quarter of 2011.

The British Chamber of Commerce (BCC) also said that there had been an ?encouraging? pick up in growth in the first quarter of the year.

The results show a ?welcome improvement? after the disappointing figures for Quarter 4 2011. Although most national balances remain below their pre-recession levels, almost all have strengthened, for both manufacturing and services, and are now much stronger than during the worst phase of the recent recession.

The BCC also predicts growth of 0.3% for the first quarter of the year. It expects growth of 0.6% for the whole year, and called on the government for ?forceful? measures to kick start the recovery.

Every quarter the BCC surveys 8,000 businesses around the UK. This Quarterly Economic Survey is the largest and most representative independent business survey of its kind in the UK. The latest survey found a ?welcome improvement? in both confidence and orders.

The latest encouraging forecasts come from the International Monetary Fund?s (IMF) World Economic Outlook on 17th April. It predicts the UK economy will grow by 0.8% this year, an improvement its January forecast. There has been a ?reacceleration of activity?, with ?high frequency indicators? pointing to stronger growth.

The IMF raised its forecast for the global economy to 3.5% for this year and 4.1% for 2013. The Eurozone is now expected to contract by less (-0.3%) than previously thought. Again though it warned that although the global economy is still improving it is still fragile and risks remain. The biggest threat would be a disorderly default in the Eurozone.

With Europe and the US continuing to work their way through their respective issues, it appears that growth prospects now look better, although some volatility is likely to persist in the medium term. There is still uncertainty surrounding the Eurozone and investors need to maintain a well-diversified to enable them to weather any market volatility.

By Bill Blevins, Blevins Franks Financial Correspondent

18th April 2012

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