LONDON (Reuters) - Britain’s economy may avoid another recession after a rise in consumer spending and an upsurge in exports offered it a solid base to bounce back from a fourth quarter dip, but a vigorous return to health is unlikely.
The Office for National Statistics confirmed its earlier estimate that the economy shrank by 0.2 percent in the final quarter of 2011, largely due to a slump in investment at a time when the turmoil in the euro zone was at its most disruptive.
But the strong consumption and export performance chime with recent business surveys indicating a pick-up in activity at the start of 2012.
High unemployment and the overall meagre recovery from a 2008-2009 slump are keeping pressure on Chancellor George Osborne to find ways to boost growth without wavering on his plans to erase the country’s huge budget deficit.
With substantial cuts to public spending still to come and a Britain’s main export market, the euro zone, headed into recession, the Bank of England may still need to inject further cash into the economy in the months ahead.
“We now expect a positive GDP outturn for Q1 given the upturn in many of the indicators which we’ve seen recently,” said Investec economist Philip Shaw.
“The uncertainties remain, and when economies recover from financial crises, they don’t recover in a straight line, and certainly the (Bank of England’s) central GDP forecast for 2013 does look punchy.”
The ONS adjusted annual growth in the fourth quarter to 0.7 percent- a slight downward revision which briefly pushed the pound lower against the dollar.
Consumer spending rose by 0.5 percent on the quarter - the first quarterly increase in 1-1/2 years - while exports jumped 2.3 percent, the ONS said.
But gross fixed capital formation dropped by 2.8 percent, with business investment falling 5.6 percent on the quarter, and slower inventory building also dragging on growth.
“The relative strength of growth (in household spending) in the fourth quarter may reflect some demand which had not been exercised in the previous five quarters,” the ONS said.
The ONS said the dominant services sector stagnated at the end of last year as manufacturers and construction firms cut back production. Separate data showed that services output grew by 0.2 percent on the month in December.
The strong rise in exports at the end of 2011 - coming after two quarters of falling sales abroad - was mainly driven by exports to non-European Union countries, the ONS said.
The German economy also contracted in the final quarter of 2011 and, despite some encouraging surveys and agreement on a bailout for Greece, the euro zone is still teetering on the brink of recession.
The Bank of England, which added another 50 billion pounds of stimulus this month, predicts that the economy will recover later this year after a weak start, because consumers should spend more as easing inflation helps their stretched budgets.
BoE Governor Mervyn King said that quarterly growth this year would probably “zigzag” due to an extra public holiday, with a quarter of contraction likely, and policymaker Paul Fisher said the outlook for the economy was incredibly uncertain and that he was keeping an open mind as to whether more quantitative easing would be required.
“If anything, I feel slightly more comfortable about the inflation outlook than the outlook for growth,” Fisher said in an interview with London financial freesheet City A.M.
And part state-owned bank Lloyds (LLOY.L) also warned of a challenging year ahead on Friday, expecting a fall in revenue for 2012, after posting a hefty loss for 2011.
Many economists still expect the central bank to add even more stimulus once the current round of quantitative easing asset purchases runs out in May.
“Additional quantitative easing by the Bank of England is more likely than not given probable erratic and muted overall economic activity over the coming months,” said Howard Archer, economist at IHS Global Insight.
Additional reporting by Fiona Shaikh and David Milliken; Editing by Toby Chopra and Patrick Graham