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Sluggish consumer threatens recovery

Posted by seumasach on May 26, 2011

Shock Slump in Spending Put’s Brake on UK Recovery

Evening Standard

25th May, 2011

Britain’s fragile recovery hopes were rocked again today after the biggest slump in consumer spending for nearly two years and a second growth downgrade in as many months from the highly regarded OECD.

The mounting squeeze on flagging family budgets from soaring prices and stagnant wages was laid bare by the latest official estimates for the first quarter of 2011, revealing a 0.6% slide in household spending.

This is the biggest fall since the second quarter of 2009, putting the UK consumer officially back in recession after a 0.3% decline in the final three months of last year.

The figures came as the OECD international think tank cut growth forecasts for the UK this year to just 1.4% after earlier trimming its estimates in March, and also called on the Bank of England to heap more pain on households with interest rate hikes to tackle soaring inflation.

The Office for National Statistics left its initial first-quarter estimate of UK growth unchanged at 0.5% but analysts were also shocked by a 7.1% slide in business investment spending, despite a boost to the economy from Government spending and trade. Public sector spending is set to slow dramatically in the months ahead as deficit-busting plans step up a gear.

Trade made a welcome contribution – adding 1.7 percentage points to growth – but the figures were flattered by comparison with the previous quarter, when aircraft imports jumped to beat a VAT hike.

Capital Economics’ senior UK economist Vicky Redwood said: “A re-balancing of the economy away from consumers and towards the external sector is what we have all been waiting for. But although high inflation and the fiscal squeeze are likely to keep domestic demand subdued, we doubt whether net trade will continue to provide such a strong contribution to growth, especially given the signs of fragility in the global recovery.”

The latest gloom on household finances comes after Bank of England monetary policy committee member Paul Fisher said this week that a sluggish consumer was a major risk to recovery and warned that hiking interest rates “could be exactly the wrong thing to do at this precise moment”.

But even as the OECD cut growth forecasts it also called for rate rises from the Bank to get a grip on inflation which, running at 4.5%, is more than double the Bank’s official 2% target.

The think tank said “a modest increase in interest rates should be taken during this year to stave off increases in inflation expectations, which are already elevated”.

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