Data released in 2011 calls into question the undelying strength of the economy

The Office for National Statistics estimates GDP contracted 0.5% in Q4 2010, based on actual data for October and November, and a best guess for December. The unemployment rate edged up in November, inflation remained stubbornly high and the full impact of the deficit reduction plan has not even been felt yet. The UK economy ended the year with a whimper.
So what will this year bring? Well, the outlook for manufacturing and services is surprisingly positive. The UK manufacturing and services purchasing managers’ indices (PMIs) accelerated sharply in January and data from the CBI is similarly upbeat, underpinning economists’ views that Q4 was a blip.

Increases to national insurance and fuel duty will do little to strengthen confidence

Inflation in fuel and raw materials prices is a concern, aggravated by supply constraints caused by the flooding in Australia. With the inflation rate at nearly double earnings growth, household spending power is being eroded and this will weigh on confidence. After January’s VAT increase, the GfK NOP consumer confidence index fell to its lowest level since March 2009. Forthcoming increases to national insurance and fuel duty will do little to strengthen confidence. From an industry perspective, add materials price inflation to weak domestic demand and strong competition on price and the result is damaging.

The retrenchment in Q4 2010 highlighted how rocky the road to recovery can be. Catch-up after bad weather in Q4 and a growth in manufacturing activity and the services sector, means growth is likely to resume in Q1 2011. George Osborne will not have the benefit of Q1 GDP for his budget on 23 March but businesses and consumers will be hoping concessions are made to households, which have a role to play in the recovery.

Kelly Forrest is senior economist at the CPA