Prospects for Recovery in the UK economy 2012?

Given very low expectations, there are some encouraging signs for a weak economic recovery in the UK. The OBR increased growth forecasts to 0.8% in the UK for 2012.

Helped by the recovery in the service sector, it looks like the UK will avoid a double dip recession. This still leaves GDP below the 2008 peak with unemployment close to record levels, but looking at some of our European neighbours – it could easily have been much worse.

Despite the ongoing economic crisis, the UK economy has retained some protection through:

  • Policy of quantitative easing which has helped increase monetary base and a very modest increase in bank lending
  • Devaluation of Pound which is slowly starting to help exports
  • Limited fall in house prices compared to other countries.

However, there is still mixed evidence on the prospects of the economy.

  • Consumer confidence levels fell in February reflecting uncertainty over living costs, unemployment and spending cuts.
  • Rising oil prices will continue to depress consumer disposable income with petrol rising to 140p per litre.
  • Europe faces a much more serious recession. The crisis is far from over, and still, a downturn in Europe could adversely affect the open UK economy.
  • More spending cuts still need to be implemented.

UK v Eurozone

One issue that always stands out is the fact that had events been different, the UK could easily have been like Greece and Portugal.

Greece and Portugal are facing a very serious economic crisis with a real rise in poverty – levels of poverty not really seen in Europe during the postwar period. Greece and Portugal are unfortunate examples of what happens when a country gets stuck into a deflationary / debt / austerity trap. Public sector workers in Portugal are seeing significant wage cuts combined with rising utility prices. It is not uncommon for people to see 10% fall in wages. Unemployment stands at 14% (BBC report on Portugal)

The Portugese economy fell 1.7 % in 2011 and is forecast to fall 3.3% in 2012.

In 2011, the Greek economy contracted 7.5% and is in freefall. Greece may be setting a record for the longest period of economic contraction on record – beating even the US record in the 1930s. (BBC link)

Spain has unemployment rate of 25%, yet under pressure from the EU, it is committed to seeking to reduce its budget deficit to 3% of GDP. GDP will fall by 1% this year.


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