UK Heading for Double Dip

Posted on: 08.03.2011    15:59:47

The U.K. government is engaged in the country’s biggest fiscal squeeze since World War II. Growth faltered and the economy shrank in the final quarter of 2010. January’s optimism has been replaced by widespread concern in February and March as barometers like packaging and recruitment show slow downs.

With spending cuts due to take effect from next month, David Cameron is trying to drive growth in the private sector by easing planning restrictions, cutting business taxes and making it easier for small companies to bid for public contracts but this will lag the economics of today and it remains to be seen if this is more headline grabbing than real economic stimulus.

Soaring food and energy costs pushed inflation to 4 percent in January, twice the Bank of England’s target. While the central bank expects inflation to accelerate in the coming months, it has kept its benchmark interest rate unchanged. Still, three of the Bank of England’s nine policy makers last month voted for an increase but in our view an increase now would be dangerous.

Are we heading for a perfect storm? Monetary and fiscal tightening is coming to the U.K. at the worst of all times, when the economic activity is very weak and a double dip recession a really possibility.

 

Author: Chris Slay

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