Growth seen remaining muted

LONDON Thu May 13, 2010 1:25pm BST

Shoppers pass a closed down shop in the affluent Kensington district of London October 22, 2009. REUTERS/Luke MacGregor

Shoppers pass a closed down shop in the affluent Kensington district of London October 22, 2009.

Credit: Reuters/Luke MacGregor

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LONDON (Reuters) - Prospects for economic growth remain muted as Britain faces up to its first coalition government for decades, forcing the central bank to hold rates until 2011, the latest monthly Reuters poll found.

The survey of over 40 economists, about half of which were polled before the Conservative party formed a coalition government with the Liberal Democrats, predicted UK economic growth of 1.1 percent this year and 2.2 percent next.

The economy, which at the end of last year escaped from its worst peacetime recession, is seen growing 0.5 percent in the current quarter. It will then pick up some momentum to grow 0.6 percent in the next two, in line with last month's poll.

"We continue to expect a gradual recovery in the UK economy over the next year, although it is likely to be a bumpy ride," said John Hawksworth at PwC.

New Prime Minister David Cameron's Conservatives and the smaller Liberal Democrat party struck a coalition agreement this week in a deal between two usually ideologically opposed parties that analysts say is likely to lead to future instability.

"We liken the new Cameron-Clegg partnership to a journey through a 'tunnel of love' amusement park ride. The pair have been put in a small boat which will be floating through a long dark tunnel," said Azad Zangana at Schroders.

"If all goes well, the pair will make a nice couple by the time they come out at the other end, hopefully with public finances being returned to a sound footing. If not, and if either party rocks the boat, this coalition could find itself very wet, and the country being asked to vote again before we know it."

A smaller sample of economists gave a 50-50 chance that Britain would see another election within the next 12 months.

The partnership will have to tackle a record budget deficit running at more than 11 percent of GDP, but is expected to implement Conservative plans to cut six billion pounds of spending this financial year.

Asked about the likelihood that Britain would lose its top-notch triple-A credit rating with a Conservative-LibDem partnership, the same smaller sample gave a 15 percent chance that it would be lost. Half of the sample were polled before the coalition was formed.

BANK NOT BUDGING

The median of over 60 forecasters expect the Bank of England to hold rates at their record low of 0.5 percent until next year, hiking them by 50 basis points in the first quarter.

Such a move is a quarter later than seen in a Reuters Bank of England Poll, published late last month ahead of May 10's Monetary Policy Committee meeting.

"The outlook for monetary, real or inflationary developments in the UK suggests little room for rate hikes over the next year," said Lena Komileva at Tullett Prebon.

The BoE said on Wednesday inflation will fall below its 2 percent target even if interest rates stay at their record low and the new government does not put in place extra fiscal tightening.

The new BoE projections show inflation at around 1.4 percent in two years time if interest rates rise as markets expect and just below 2 percent if they are kept steady at 0.5 percent.

The Reuters poll saw inflation averaging 2.7 percent this year and dropping to 1.7 percent in 2011, in line with last month's poll.

Across the ocean in the United States, the world's biggest economy, growth is expected to be a relatively heady 3.1 percent this year and 2.9 percent in 2011.

Closer to home the 16-nation euro zone's economy is facing its own war and seen growing 1.0 percent this year and 1.5 next.

The European Union and International Monetary Fund unveiled a $1 trillion emergency package to stabilise the euro zone but markets remain cautious whether the plan will prove a long-term solution to problems plaguing the 11-year old bloc.

(Polling by Bangalore Polling Unit)

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