Britons get gloomier - long, hard revival to come

LONDON Fri May 11, 2012 12:59pm BST

A Shopper carries bags as she leaves a Tesco store near Manchester, April 18, 2012. REUTERS/Phil Noble

A Shopper carries bags as she leaves a Tesco store near Manchester, April 18, 2012.

Credit: Reuters/Phil Noble

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LONDON (Reuters) - Britons turned gloomier last month as a slump in construction pointed to an even deeper recession and producers ramped up prices, highlighting the long and difficult road back to economic health.

The economy has not fully recovered from the downturn caused by the 2007-2009 financial crisis, with many Britons left poorer as meagre wage growth has been eaten up by rising prices and government tax hikes.

Central bankers and politicians have only limited options to support the economy.

The Bank of England decided on Thursday not to give the struggling economy another cash boost, as its concerns over stubbornly high inflation outweighed worries of a prolonged recession and dangers from the euro zone crisis.

Nor can consumers and businesses rely on much help from the government, after Prime Minister David Cameron reaffirmed his commitment to cutting a huge budget deficit, defying criticism over a lack of bold steps to kick-start growth.

Consumer morale worsened last month as Britons became more worried about jobs, lender Nationwide said on Friday, and the mood may darken even further as news that the economy slipped into recession came out after its poll was conducted.

"It's all a bit grim - it's stagflation Britain," said RBS economist Ross Walker, referring to a 1970s term combining economic growth stagnation with inflation.

Britain's manufacturers raised prices more than expected in April despite lower input costs, official data showed, increasing the risk that consumer price inflation may not fall as fast as the central bank hopes.

The Office for National Statistics also said that construction output plunged by 4.8 percent between January and March - more than estimated in the first reading of first-quarter GDP. This revision alone pushes the economy deeper into the red, shaving off another 0.1 percentage point of GDP growth.

Extremely weak construction output was the main drag in the first quarter, contributing to an economic contraction of 0.2 percent after a 0.3 percent fall late last year.

The European Commission, meanwhile, cut its growth forecast for Britain for 2012 a notch to a mere 0.5 percent - below the 0.8 percent predicted by the British government's budget watchdog OBR - though the Commission saw a recovery starting in the second half of the year and growth of 1.7 percent in 2013.

The body said Britain's companies were unlikely to spend their cash piles on major investments before consumer demand increased towards the end of 2012, adding that access to bank credit remained an issue for smaller firms.

The euro zone debt crisis, which has pushed some of the areas's countries into recession, was hurting British exports, it noted.

NOT ALL DOOM AND GLOOM

A recent rise of the pound to a 3-1/2 year high against the euro may compound these export woes, though the stronger currency does ease cost pressures as it makes imports cheaper.

Many economists argue, however, that the economy may be in better shape than official figures suggest.

Bank of England Governor Mervyn King said last week that the economy was recovering slowly and steadily, though many economists expect him to leave the door for more easing open when he presents the central bank's new growth and inflation forecasts next week.

The BoE and many economists have voiced doubts about the GDP data as business surveys painted a firmer picture, and on Friday some reiterated these doubts.

"The scale of contraction that we're seeing in construction doesn't seem to fit with other anecdotal reports or indeed the feedback from construction industry participants themselves," said Lloyds economist David Page.

"It adds to our view that GDP is probably under-reporting the true underlying pace of economic activity," he said.

And for some Britons it is still business as usual: the country's biggest department store chain John Lewis reported another double-digit rise in weekly sales. The retailer has been outperforming the wider market as its generally more affluent customers have been less impacted by the economic downturn.

However, high inflation may continue to weigh on most consumers, depriving the economy of one of its main drivers.

Producer output prices rose 3.3 percent on the year. While this was the lowest annual increase since December 2009, it was still well above forecasts for a 2.9 percent rise.

(Additional reporting by Michelle Martin, David Milliken, Paul Hoskins and James Davey. Editing by Jeremy Gaunt.)

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