Weak UK growth

The UK economy has begun to recover: since the first quarter of 2011, in which GDP growth contracted by 0.1%, the UK economy has seen positive growth in output.

However, this recovery is weak.  Growth has remained stagnant; GDP only increased by 0.2% in the second quarter of 2011.  This is lower than the rate of growth, 0.5%, recorded in the first quarter of 2011.  The most significant negative contribution came from the production industries which decreased by 1.4%.

The ONS has attributed this weak growth to the weather.  In the first quarter, it was the snow and cold weather that decreased our productivity.  In the second quarter, it was the sunshine – extra holidays, including for the Royal Wedding.  If not for this, say the ONS, growth would have been 0.5% stronger.

Other reasons include:

• Weak consumer confidence – anticipation of weak growth leads to consumers saving their extra income.
• Fragile world economy – the continuing euro zone sovereign debt crisis and the USA’s credit downgrade may have further damaged consumer confidence.
• Government spending cuts – in an attempt to rebalance the economy, the Coalition government have reduced public spending.  The other components have not yet made up for this fall in government spending.

 There are various policy responses that could be adopted to stimulate growth:

• Maintain 0.5% bank rate – on September 8, the MPC voted to keep bank rate at this historic low.  A hike in interest rates may further weaken growth by discouraging business investment.
• Plan B – perhaps the government needs to rethink its aggressive public spending cuts.  The calls of “too soon, too quickly” may be vindicated.  Keynesians would argue for the government to meet the shortfall in private demand.  However, the government would claim that the cuts are actually necessary for a recovery – if the UK does not take control of its debt, then we could lose our credit rating causing interest rates to rocket – and thus, jeopardising the recovery.
• Quantitative easing – currently at £200bn, this could be further pursued in an attempt to boost liquidity in the economy.  However, this is probably unwise with inflation at 4.4%.