Market Analysis Spring 2011


Market Overview


Since the last Winkworth Market Report the key economic indicators have provided mixed signals over the potential performance of the UK economy in 2011. The most devastating blow to confidence, however, was dealt by the preliminary GDP figures which showed the economy shrank 0.5% (since revised to 0.6%) in Q4 2010, a far weaker performance than even the low end of original expectations.


National Statistics acknowledged that 0.5% of this loss was due to the extreme weather, but even at minus 0.1%, the outturn for the quarter is far poorer than expected. The preliminary figures are always subject to heavy revision, though, so we should not get carried away (yet) and assume the UK is sinking back into recession, no matter what the headlines. (Figure 1)


The OECD is now forecasting GDP growth of 1.4% for 2010, 1.5% for 2011 and 2.0% for 2012. The Office for Budget Responsibility’s numbers from their November forecast were 1.8%, 2.1% and 2.6% respectively. Embarrassingly, the Chancellor, had to lower his growth forecasts further to 1.7% in the recent Budget.


Similarly, the CBI has been forced to reconsider its growth forecast. The impact of December’s bad weather means the UK’s leading business group now expects this year’s


4 Market Analysis Spring 2011


GDP growth rate to be 1.8%, down slightly from an already sluggish 2.0%. Its forecast for 2012 is for slightly faster growth of 2.3%, down from a forecast of 2.4% in December. Despite the New Year rise in VAT, the CBI expects the bounce back after the bad weather of December to help quarter-on-quarter growth edge up to 0.6% in Q1 2011. The CBI’s forecast for the remainder of 2011 is broadly unchanged, with steady but modest growth of 0.5% expected over each of the next three quarters.


Independent economic forecasters have revised their average 2010 GDP growth expectations from 1.8% to 1.5% thanks to the severe impact of the weather in Q4. This has had an effect on the revisions for 2011, with forecasts being revised down to 1.8% (from 2.0%) with growth expected to be 2.1% in 2012.


In line with many commentators’ expectations, rates are forecast to increase this year, finishing at 1%. The question is when and by how much rates will increase. The latest inflation figures make


Figure 1 UK GDP growth


%


-6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6


Independent economic forecasters have revised their 2010 GDP growth expectations from 1.8% to 1.5% thanks to the severe impact of the weather in Q4.


2004


2005


2006


2007


2008


2009


2010


GDP annual growth GDP quarter on quarter growth


Page 1  |  Page 2  |  Page 3  |  Page 4  |  Page 5  |  Page 6  |  Page 7  |  Page 8  |  Page 9  |  Page 10  |  Page 11  |  Page 12  |  Page 13  |  Page 14  |  Page 15  |  Page 16