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UK economy: Chancellor says outlook looking 'brighter' - but there isn't a huge amount to celebrate

UK economy: Chancellor says outlook looking 'brighter' - but there isn't a huge amount to celebrate

While the economy has proved more resilient than some feared, the overall picture is one of stagnation, with official figures released on Thursday showing there was an unexpected zero growth in GDP in February.

Jeremy Hunt struck an upbeat tone following the publication of the latest economic growth data for February.

"The economic outlook is looking brighter than expected - GDP grew in the three months to February and we are set to avoid recession," he said.

Even though the country was deep into a winter energy crisis, Britain avoided a recession towards the end of last year.

The economy confounded expectations again in January to eke out growth of 0.4%.

At 0%, February's performance was a little weaker than expected but the economy has been in positive territory for the past three months.

However, there isn't a huge amount to celebrate.

While the economy has proved more resilient than some feared, this doesn't change the overall picture, which is one of economic stagnation.

In February, the country was held back by industrial action of teachers, civil servants and healthcare workers, which weighed on public sector output.

Output in the education sector dropped by 1.7% month-to-month, subtracting 0.10 percentage points from growth in GDP.

In the public administration and defence sector, it fell by 1.1%, subtracting 0.06 percentage points from GDP.

The rest of the economy fared better.

In the private sector, output rose by 0.2% in the month as mild weather boosted output in the construction, hospitality and entertainment sectors.

These figures are a big departure from 20 years ago when Britain enjoyed growth of between 2-3 per cent a year.

Instead, we can expect the economy to shrink by 0.3 per cent this year, if recent forecasts by the International Monetary Fund (IMF) are to be believed. This will make Britain the worst performer of our G7 neighbours.

Again, these forecasts are an improvement on earlier projections but not enough to dramatically change the country's prospects.

Weak growth combined with high inflation bodes ill for our living standards.

The Office for Budget Responsibility is pencilling in the biggest two-year drop in disposable incomes since the 1950's.

However, it's a complicated dynamic because efforts to stamp out inflation often inflict - and require - a period of economic pain.

If anything, brighter than expected economic data in recent months will give the Bank of England more breathing room to raise interest rates from their current level of 4.25%.

The full effects of the previous rate rises have not yet filtered through but further rises may be required to dampen economic demand enough to bring prices under control.

Unfortunately, a policy-induced recession later in the year may be necessary.


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