UK economy to face five more years of recession

Despite signs of positive employment data and good import projections, the UK will experience nominal GDP growth of just 1.5 per cent over the next half a decade, meaning real growth – after inflation is taken into account – will be negative. Furthermore UK pension fund liabilities will stay high, and asset gains will continue to be sluggish.

James Carrick, economist at L&G, stressed that although the outlook for the economy’s fundamentals was strong, fiscal policy would remain anti-growth. “Unfortunately, fiscal austerity plan A is here to stay; cuts to public spending aren’t going away and aren’t helping what is basically a demand problem,” he said.

Carrick predicts that 2012 will close at 0 per cent nominal growth, with a negligible improvement in 2013 to 0.5 percent. His figures suggest 10-year gilt yields will remain under 2.5 per cent at the end of 2013, and interest rates will stay at 0.5 per cent for the foreseeable future.

The predictions defy evidence of a recovering labour market, the so-called “productivity puzzle”, which shows total hours worked in the UK is rising, despite growth stagnation.

Carrick emphasised that the UK market was much more flexible than the US in this regard, and showed “no sign of structural rise in unemployment”.

In addition, the outlook for imports is good, as for the first time in 10 years non-energy consumer prices and import penetration are realigning in the wake of higher oil and shipping prices, which is good news for UK manufacturing.

Carrick described the economy as “like a baby taking its first steps”, but warned that despite tentative moves forward, government policy was still depressing growth.

“The Office for National Statistics' five-year projections of 3 per cent seem very optimistic for me. Despite fundamental strength, exports are weak and fiscal tightening will continue, therefore real GDP growth will be negative,” he added.