The "bouncebackability" of British business should help the country to avoid the much-feared "double dip" recession, a member of the Bank of England's Monetary Policy Committee said yesterday.
Andrew Sentance's optimistic assessment of the prospects for a sustained recovery came despite a dreadful start to the new year on the high street, with snow and the return of VAT to 17.5 per cent combining to keep shoppers at home despite deep discounts in the January sales. According to the CBI's Distributive Trends survey, the sales balance fell to -8 in January from +13 in December, despite retailers' earlier forecasts of flat sales and economists' expectations of improvement.
Speaking at the British Property Federation's Residential Conference in London, Mr Sentance said that in common with many economists, he believed the recovery started earlier than the official figures have indicated.
"The latest GDP figures released yesterday also showed a return to growth in the final quarter of last year though other indicators – from the labour market, business surveys and measures of retail spending – continue to suggest that recovery started earlier and may have been stronger than the provisional GDP estimates currently suggest".
The Office for National Statistics said Britain's recession finally ended in the fourth quarter, although barely, with the economy showing growth of just 0.1 per cent, compared to the revised figure of a 0.2 per cent contraction in the third quarter.
Mr Sentance hailed the "resilience" of British companies. He said: "I have been struck by the way most companies have developed strategies to cope with the very abrupt downturn they have faced – both in terms of taking the short-term actions necessary to deal with a sharp drop in demand, and their commitment to keeping vital capacity and skills in place for when the upturn comes. I take this resilience as sign of medium-term confidence in the health and vitality of British business, and a very encouraging sign for the UK economy to sustain an upturn."
He said the weakness of sterling should help to drive an export-led recovery: "As long as the international economy continues to grow healthily, I believe we should avoid the feared 'double dip' recession. But the pace of recovery is still very uncertain."
Mr Sentance highlighted the risk that "fiscal policy is tightened more aggressively after the election", which could be seen as a reference to swingeing cuts in public spending hinted at by the Conservatives, who plan a post-election "emergency budget" if they emerge victorious.
He also hinted that interest rate rises may be necessary later in the year. "As the current strains in the financial sector begin to ease, the MPC will need to assess whether monetary policy needs to be so supportive of growth and whether there are inflationary risks from such a policy."
He continued: "If the headwinds from the financial crisis and the consolidation of public finances dominate the outlook, the balance of risks to inflation are likely to be to the downside, once the temporary factors currently affecting inflation (such as the VAT rise) have dropped out of the equation.
"But if the tailwind from the global economy, a competitive exchange rate and a recovery in confidence are felt more strongly, then the margin of spare capacity could be eroded more quickly. In that scenario, there will be more upward pressure on inflation, both from domestic price pressures and from the global economy."
Mr Sentance also predicted that the housing market would likely recover more quickly than in the 1990s.
The CBI said retailers expect February's sales to be "largely unchanged" on their levels of a year ago. The three-month moving average of sales volumes fell back from November and December's levels, although it remained higher than earlier in 2009.
Andy Clarke, chairman of the CBI Distributive Trends Panel and chief operating officer of Asda, said the year had "opened on a weak footing, especially compared to the tail-end growth of 2009". However, he added: "The picture should stabilise in February. While grocers and shoe shops had a good start to the year, it has been slightly disappointing for the sector as a while. The big freeze kept many shoppers away from the January sales and the VAT hike has hit bigger purchases like furniture and electricals."Reuse content