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UK Recovery 'Balanced On A Knife Edge'

UK Recovery 'Balanced On A Knife Edge'

11:04am 29th June 2011

There wasn't much in the way of growth at the start of this year.

That's what the latest estimate seemed to confirm, with expansion of just 0.5% in GDP in the first quarter after shrinking at the end of last year.

But there's much more going on below the surface.

The latest debate raging among economists is whether we're seeing a "rebalancing" of the economy.

With cash-strapped consumers and a squeeze on government finances, hopes are being pinned on a revival in exports to rescue growth this year.

But the evidence that this is happening is mixed.

What we did get confirmation of is that the consumer is in a pickle.

Real household incomes fell by 0.8% in the first quarter as weak wages growth and tax hikes took their toll.

It was no surprise that consumer spending fell by 0.6% last quarter, and the proportion we're squirrelling away in savings slipped.

With intensifying pressure on budgets continuing, it's hard to see how that situation is going to improve.

With retailers no longer able to enjoy that cushion of a cosy consumer environment, it's no surprise that an increasing number of retailers with a less than solid strategy - be in Oddbins or TJ Hughes - are going to the wall.

In the bigger scheme of things, consumer growth makes up about two-thirds of the economy, so if we can't rely on the man on the street, then growth will have to come from exports.

But the recovery there has been slower to take off than expected.

The current account on our balance of payments narrowed by far less than expected.

Despite claims that foreign trade made the biggest contribution to UK growth in 30 years, what that actually meant was that the overall deficit is still equal to 2.5% of GDP.

Export growth was actually revised down in the first quarter - whether they can pick up and fill the gap this year in growth is still open to debate.

And in terms of the first quarter, growth was helped by rising government spending - as the cuts don't fully get under way until later in the year.

That of course means we can't rely on that safety net to maintain the economy either.

So on balance, the recovery remains very much on a knife edge.

With big questions remaining on our ability to boost the amount of goods and services we sell abroad sufficiently, the spectre of "double-dip" may hang around for a while.

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