UK economic recovery on the verge of collapse

Business Editor,David Prosser
Saturday 04 June 2011 00:00

The prospect of Britain's economy moving decisively into recovery mode were dealt another blow yesterday, with two new reports highlighting mounting difficulties.

Markit, the analyst that compiles the closely watched monthly surveys of activity in the services, manufacturing and construction sectors, said its latest research suggested the UK economy was on target to record growth of just 0.3 per cent during the second quarter of the year, even more disappointing than the first quarter's 0.5 per cent.

Figures published by Markit yesterday showed that the services sector, which accounts for more than two-thirds of Britain's economy, continued to grow last month, but at a muchslower rate. The purchasing managers at services companies, who Markit surveys to compile a picture of activity in the sector, said their businesses expanded in May at their slowest rate for three months.

The downbeat services surveyfollows the depressed picture Markit revealed of the manufacturing sector earlier this week, with economists warning that the extra bank holidays last month could not fully account for the setbacks.

Chris Williamson, Markit's chief economist, warned that the Bank of England's most recent forecasts for economic performance this year, which had to be downgraded from its earlier estimates, might have to be cut once again. "There is an increased risk that growth in 2011 will fall below the 1.8 per cent expansion forecast in the latest Bank of England forecast," he said.

While Markit's assessment of the construction sector's performance in May, published on Thursday, wasslightly better, that industry is recovering from unprecedented lows – and only very slowly.

The Office for National Statistics said yesterday that the number of new orders for construction work fell by 23 per cent during the first three months of the year, the steepest decline theindustry has experienced since 1987.

Construction companies believe the slowdown reflects the beginning of public sector cuts and expect their output to be muted for the rest of the year.

Vicky Redwood, an economist at the think tank Capital Economics, said the latest data "provided further evidence that the recovery is still struggling".

"Some of this weakness is probably temporary," Ms Redwood added, pointing to last month's bank holidays. "Nonetheless, there are few other signs that the recovery has got back on track following the soft patch at the turn of the year."

Howard Archer, the chief UK economist at IHS Global Insight, also warned that there was little reason to expect areturn to stronger growth from the all-important services sector. "Not only did the services business activity index retreat again in May, but a moderation in incoming new business growth and a second successive contraction inoutstanding business is likely to weigh down on activity in the near term at least," he warned.

The Bank of England's Monetary Policy Committee is due to hold its monthly meeting on Wednesday and Thursday next week, but while inflation continues to run well ahead of its target, any outcome other than adecision to keep interest rates on hold would be a major shock.

Until relatively recently, the MPC had been expected to begin raisinginterest rates from their record low of 0.5 per cent last month, but the lack of any sustained economic recovery has stayed its hand. Market professionals do not now expect a rise before November at the earliest.

The setbacks will also add to the pressure on George Osborne, the Chancellor, who continues to insist the Government must hold its nerve by not deviating from his plans to cut borrowing, despite the increasing evidence that this policy may be damaging growth. His opponents have been quick to seize on the poor data, calling for a slowdown in the pace of deficit reduction.

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