Economy set to speed up and beat UK's rivals, says OECD

Election boost for Brown as second poll confirms rising trend in business confidence

Economics Editor,Sean O'Grady
Thursday 08 April 2010 00:00

The Government's claim that Britain is one of the better performers among the advanced economies received a boost yesterday.

The latest growth forecasts from the Organisation for Economic Co-operation and Development (OECD), and a prediction from a leading UK economist, suggested that official figures for gross domestic product (GDP) will show an acceleration in the pace of recovery when they are published on 23 April – two weeks before the general election.

Fears that the severe weather in January might depress economic activity seem to have been overdone. The OECD also seems to side with the Government's argument that fiscal tightening should take place later rather than sooner.

By contrast, the latest assessment of eurozone GDP shows that the single currency area, which has been riven by the Greek sovereign debt crisis, almost lapsed back into recession at the end of last year.

The EU's statistical directorate, Eurostat, said the minimal 0.1 per cent growth it had estimated was being revised down to nil. A collapse in private-sector investment was responsible for the disappointing result. The OECD said that Germany, the largest economy in the eurozone, would see its economy contract in the first quarter of this year, despite the pick-up in world trade. As the UK's largest export market and source of investment, a slowdown in the eurozone will inevitably have a dampening effect on Britain as the year wears on.

The chief economist at Markit, the company that conducts surveys of business confidence for the Chartered Institute of Purchasing and Supply, is predicting a pick-up in UK growth to 0.5 per cent in the first quarter of this year, up from 0.4 per cent in the last three months of 2009.

Chris Williamson says the economy is witnessing "an ongoing, robust expansion of private-sector output" and "the strongest rate of growth since the third quarter of 2007".

GDP is being boosted by firms rebuilding stock levels and improving output and investment. The CIPS's surveys indicate an imminent end to the two-year recession in the construction industry. Yesterday, it also reported that business confidence in the services sector, which comprises about 70 per cent of GDP, slipped back slightly last month but remained firmly in positive, expansionary territory, which is an encouraging omen.

With a marked bounce back in UK manufacturing, the growing consensus view is that a 0.5 per cent boost to GDP will be announced on 23 April. The OECD also reported a 0.5 per cent rise, with a further acceleration to 0.8 per cent in the second quarter, which would leave the UK with the second-best performance among the G7 group of industrialised nations, behind Canada.

However, the OECD also sounded a cautious note, saying: "Despite some encouraging signs on activity, the fragility of the recovery, a frail labour market and possible headwinds coming from financial markets underscore the need for caution in the removal of policy support. Central banks have already begun to rein in the exceptional liquidity stimulus injected during the recession. The normalisation of policy interest rates should be carried out at a pace that will be contingent on the strength of the recovery."

On fiscal policy, the OECD pointedly added: "Consolidation should start in 2011, or earlier where needed, and progress gradually so as not to undermine the incipient recovery."

Meanwhile, the Office for National Statistics said the profitability of British business had risen for the first time since the downturn began. The net rate of return by private non-financial corporations in the fourth quarter of 2009 was 11.6 per cent, edging up from 11.5 per cent in the period from July to September.

Manufacturing was the least profitable sector of the economy, with returns reaching just 8.3 per cent; the offshore oil industry had a 29.8 per cent net rate of return. Profitability will have been boosted by restrained wage growth.

The Bank of England's Monetary Policy Committee will announce its latest decision in interest rates and quantitative easing today. City economists unanimously expect no change at such a politically-charged time.

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