Slow growth of UK economy is likely to be as good as it gets

On the face of it, today's official bulletin on the state of the economy was a bit of a damp squib. The delay in publishing the third estimate of growth in the first three months of 2010 had raised speculation that the Office for National Statistics might have a big growth revision up its sleeve, but in the end expansion was left unchanged at 0.3%. Dig deeper into the release, though, and there are nuggets to be mined. Firstly, the recession was deeper than the government originally believed, with the deterioration in activity more marked in the early stages of the downturn. In the first quarter of 2008, when Northern Rock was finally taken into public ownership, the economy grew by 0.5% rather than the previous estimate of 0.7%, and contracted by 0.3% rather than 0.1% in the second quarter, a period when the Bank of England was fretting about the risk to inflation from rising oil prices. The upshot of the new information is that the ONS now says the economy contracted by 6.4% – compared with 6.2% – from its peak in the first three months of 2008 to its trough in the final three months of 2009. This should have a small, albeit modest, effect on interest rates, since one of the key things looked at by the Bank's monetary policy committee is spare capacity in the economy. A bigger decline in output means more spare capacity, weaker inflation and less pressure to raise interest rates. The sense in the City that the Bank will delay any increase in the cost of borrowing until late this year or 2011 was reinforced by the ONS breakdown of growth in the first three months of this year. Put simply, this revealed that there was no boost to the economy from exports, despite the 25% depreciation in the pound from 2007 to 2009, and that consumer spending actually fell slightly. Had it not been for the contribution to growth made by the government, the economy would have dipped back into recession during early 2010. Activity is likely to have picked up a little in the second quarter, and growth of around 0.5%-0.6% can be expected when the flash estimate is released by the ONS later this month. But this may be as good as it gets. Consumers ran down their savings to fund spending in the first quarter, but will be reluctant to continue doing so at a time of rising unemployment, sluggish wage growth and falls in house prices. A survey by Gfk NOP today shows that consumers are already thinking seriously about belt tightening – 46% of those polled say they will cut spending on furniture, 45% will be spending less on electrical goods and 39% will be economising on eating out. Although the full effects of George Osborne's spending cuts and tax increases will not be felt until 2011, the public already seems to be getting the message that tough times are ahead. For the economy as a whole, the outlook is similarly bleak. Exports are struggling, the consumer sector is depressed and the prop from the public sector is about to be kicked away. The second half of 2010 will be dominated by talk of double-dip recession.