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Prognosis for the UK economy: Short-term pain, long-term promise

Authors: Andrew Sissons Andrew Sissons

27 April 2011

This morning’s GDP figures – 0.5% growth in the first quarter of 2010 – aren’t great news for the UK economy, but they’re not a complete a disaster either. There will be some relief that we’ve avoided the dreaded double-dip this time, but there’s no getting away from the fact that the economy has effectively been flat over the last nine months.

As I wrote yesterday, the road to recovery is far from clear; there are still risks that the UK could slip back towards recession. The biggest risk comes from the tightening of the government’s purse strings at the start of April, which had no effect on the latest GDP figures. Government services – mostly health – continued to grow up to March contributing 0.2% to the overall growth of 0.5%. This growth will almost certainly decline over the next quarter, leaving the private sector to take up the strain.

While a return to recession during 2011 now looks unlikely, the impact of a stagnant economy will be felt most severely by people who are unemployed, particularly those under 25 or over 50. The early stages of the recovery have made little impact on the 2.5 million strong ranks of unemployed people, and continued slow growth will severely limit job prospects. The alarming decline in construction activity – down by 4.7% in three months – is also a serious short-term worry, especially for the employment prospects of younger men.

But despite the ongoing stagnation, there are promising signs from some sectors of the economy. The strong growth in manufacturing and business services – the two key areas that will drive the recovery – suggests that the UK economy is starting to move onto a more sustainable footing. While the growth of these high-value areas is unlikely to stimulate mass job creation in the short-term, manufacturing and business services are integral to the overall health of the economy, and their sustained growth should help lift other parts of the economy. After the 1990s recession, a resurgence in these two sectors helped to usher in 15 years of prosperity, and we must strive to repeat this performance.

Overall, the UK economy remains in a precarious position, and there is unlikely to be much easing of the pain over the coming months. Any measures to stimulate demand, and to create job prospects for vulnerable groups in the short-term, would be extremely welcome. In the longer term, the only way that Britain can return to lasting prosperity is through sustained growth in our knowledge-based industries, and the prospects for this look much brighter.