Britain Crawls Out Of Recession

(Reuters) – BRITAIN only just crept out of an 18-month recession at the end of 2009, suggesting any monetary tightening remains a long way off and raising fears about the prospects for recovery ahead of an election due by June.

The Office for National Statistics said on Tuesday gross domestic product rose by 0.1 percent between October and December, well below analysts’ forecasts for growth of 0.4 percent and lower than all the predictions in a Reuters poll.

For 2009 as a whole, the economy shrank by 4.8 percent — the worst yearly performance since records began in 1949.

The Labour government has been banking on a strong bounce back to growth to help overturn its poor opinion poll ratings before an election expected in 100 days, but these weaker than expected figures make a political comeback even trickier.

“You can see there is a lot of uncertainty and therefore you would expect as you come out of recession for things to fluctuate,” Labour finance minister Alistair Darling said.

“I think we are now on a path to recovery … you need to maintain your support, don’t pull the rug from under our feet at the very time that we can see recovery.”

Sterling fell and gilt futures rose after data, which also showed output fell 3.2 percent from the same period a year ago. From peak to trough, the economy contracted six percent — far worse than the downturns of the early 1980s and 1990s.

For a graphic, click on: link.reuters.com/jak75h

“We know there are significant headwinds in Q1,” said Ross Walker, an economist at RBS Financial Markets. “Overall, the headline is disappointing but actually the underlying picture looks more worrying.”

Most analysts predict the Bank of England will halt its 200 billion pound asset buying programme — designed to pump money into the economy — next month, but Tuesday’s GDP figures are likely to boost expectations that any interest rate rises from the current record low of 0.5 percent are many months away.

Nonetheless, whichever party wins the election will have to enact dramatic fiscal tightening at some point to rein in a record budget deficit, which will be a major drag on growth.

The government has a four-year plan to halve the deficit — set to top 12 percent of GDP this year. But the Conservatives, ahead in opinion polls, say that is inadequate and pledge to start tightening fiscal policy this year, earlier than Labour.

“After this great recession, any signs of growth are welcome,” said Conservative economics spokesman George Osborne.

“We urgently need a new model of economic growth that includes a credible deficit reduction plan that keeps mortgage rates low, creates jobs and doesn’t choke off recovery.”

While Prime Minister Gordon Brown has argued his decisions have helped Britain weather the global storm, the UK is the last of the major economies to exit the downturn.

The latest figures may also increase doubts about the pace of global recovery as Britain is also the first G7 country to report GDP figures for the fourth quarter.

Evidence from the euro zone suggests its economy may have grown at a glacially slow rate in the last quarter of 2009 and the first quarter of this year.

Britain’s recession was the longest on record and policymakers expect a long slog to get the economy back to pre-crisis levels and warn the road to recovery will be rocky.

The Bank has said the extent of any fiscal consolidation will have an impact on monetary policy and analysts say sharp cuts in government spending and big tax rises may result in interest rates having to stay lower for longer to compensate.

Some economists said the preliminary estimates of GDP could be revised upward but there are also concerns about the strength of private demand, which will need to improve greatly to establish a sustainable recovery.

Bank Governor Mervyn King has said stimulus measures and a weaker pound remain the main supports to growth.

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