Prospects for the UK Economy

The preliminary estimate of GDP confirms that the UK economy finally stopped contracting in the fourth quarter of 2009, bringing to an end six quarters of continuous contraction (figure 1) but 0.1 per cent growth is disappointing. The estimate suggested that the economy contracted by 4.8 per cent in 2009. Growth was driven by the distribution and government sectors. The main contributors from the distribution sector were the retail and motor trades. This is consistent with the impact of the cut in the standard rate of VAT and the car scrappage scheme, both of which should have brought durables purchases forward into the last quarter of 2009. It also highlights the risk that, as the fiscal stimulus ends, the UK economy could stall and possibly even contract for a quarter or two. As figure 1 shows, we do not expect this to happen. We expect growth of 1.1 per cent per annum this year; stronger growth is inconsistent with a household sector undergoing a period of retrenchment and increased savings. Contributions to economic growth are expected to be the result of the inventory cycle and the influence of net trade.