March 10, 2010 / 12:57 PM / 10 years ago

Risks to UK recovery lurk behind cloudy outlook - poll

LONDON (Reuters) - Britain’s recovery from the worst recession in decades is gaining traction but confused economic data and the high risk of a hung parliament could yet snuff out its momentum, a monthly Reuters poll showed.

The survey of 65 economists conducted between Friday and Wednesday also showed a more than one-in-three chance the Bank of England will decide to extend its asset buying programme, up from the 25 percent seen February’s poll.

The global financial crisis condemned the British economy to six straight quarters of decay until the last three months of 2009, later than its U.S. and euro zone peers, when it posted growth of 0.3 percent.

And while the latest poll showed quarterly growth grinding towards 0.6 percent in the second half of 2010 — unchanged from February’s poll — respondents stressed the uncertainties.

The latest opinion polls show no political party has enough support to win outright a general election due by June, raising the prospect of a weak minority government.

“A hung parliament will mean it becomes very difficult for the ruling party to push through laws, but more critically, fiscal consolidation measures,” said Azad Zangana, European economist at Schroders Investment Management.

“This puts the UK’s AAA sovereign debt rating at risk.”

Leading economic indicators offer no clear guide either.

Official data released on Tuesday, after the bulk of the latest poll was compiled, showed the sharpest drop in exports in over three years in January. Neither the manufacturing PMI nor the CBI’s Industrial Trends Survey hinted at this, instead pointing to rising export order books.

Reflecting such uncertainty, the range of growth forecasts remained very wide in March’s poll — between 0.3 percent and 2.2 percent for 2010, and 0.6 and 3.4 percent for 2011. Medians showed a slight upgrade for the 2010 growth forecast to 1.2 percent, from 1.1 percent seen in February.

“Serious economic and financial obstacles remain to significant, sustainable growth, and we suspect that recovery will be gradual and liable to losses of momentum for some considerable time to come,” said Howard Archer at IHS Global Insight.

QE ENCORE?

The Bank of England has slashed interest rates to a record low of 0.5 percent and has engaged in a 200 billion pound quantitative easing (QE) programme of buying assets, mainly government bonds, to boost growth.

lt will probably hike its base rate to 0.75 percent in the fourth quarter, the latest median forecasts show, in line with a survey of rate strategists conducted late last month.

But there is a growing probability the Bank will extend QE — estimated at 35 percent from the median of 15 responses, compared to 25 percent from 20 responses in February’s poll.

“Assuming this recovery proceeds, we would expect the MPC to start to edge interest rates up gradually from around August, but only at a very gradual rate,” said John Hawksworth at PricewaterhouseCoopers.

“If there are any signs of the recovery stalling, however, then interest rates would be left on hold and QE could yet be extended further.”

Economists also predicted inflation would remain above the Bank of England’s aim of two percent for the rest of this year, despite Governor Mervyn King’s assertion last month that it was more likely than not to fall under target by the second half of this year.

Consumer price inflation surged to 3.5 percent in January, partly fuelled by a rise in value added tax on January 1, as well as falls in oil and food prices the previous year.

Polling by Bangalore Polling Unit; Editing by Ruth Pitchford

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