UK: Q1 Growth Prospects in the Balance

Consensus Forecasts

Following a 0.3% (q-o-q) contraction in Q4 GDP last year, latest indicators as yet do not clearly signify whether the UK economy can avoid a technical recession in Q1. The final release of the Q4 national accounts saw private consumption and gross fixed investment upgraded to +0.4% (q-o-q) and -0.2%, respectively, from +0.2% and -0.4% in the initial report. Despite below-inflation wage increases, resilient consumer demand helped to offset weakness from the industrial sector and a 4.1% (y-o-y) decline in total exports. The current account deficit widened to -£57.7bn in 2012, or 3.7% of GDP, the highest as a share of GDP since 1989. Furthermore, total exports contracted by 1.1% (m-o-m) in February, due largely to a decline in non-EU demand. Industrial production likely weighed on Q1 activity after contracting by 2.2% (y-o-y) in February. Fears of a triple-dip recession were, however, eased somewhat when the dominant services sector rebounded by 0.3% (m-o-m) in January. Recovery prospects improved a little further as the PMI for services climbed to a seven-month high of 52.4 in March. Still, on balance, our panel has lowered its 2013 GDP forecast to 0.7% from 0.9% last month.

After remaining at 2.7% (y-o-y) since October 2012, the CPI edged up to 2.8% in February with inflationary pressures stemming from a rise in utility bills. Chancellor George Osborne last month afforded the Bank of England greater flexibility to ease monetary policy even when inflation exceeds the 2.0% (y-o-y) target level. However, the MPC announced on April 4th that it would not undertake further quantitative easing or alter the record-low benchmark rate of 0.5% for now, despite the subdued growth outlook.

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