August 11, 2009
A British economic recovery may be at hand, but it would be quite fragile at least in the coming months as there are many uncertainties lying ahead, analysts said.
There have been a few "green shots" of economic recovery in the past months and more welcoming data were released last week, they said.
Britain's Chartered Institute for Purchasing and Supply (CIPS) reported last week that its index of activity in the services sector, which accounts for around two thirds of the country's total economic activity, rose to 53.2 in July from 51.6 in June, hitting the highest point since February 2008.
Readings above 50 indicate the expansion of the services sector, while those below 50 signal contraction.
An equivalent survey released earlier last week by CIPS also indicated that Britain's manufacturing sector, which accounts for around 15 percent of the economy, was also growing.
The monthly PMI (Purchasing Managers' Index) for the manufacturing sector jumped to 50.8 in July from 47.4 in June, boosted mainly by a sharp pickup in new orders.
Some Analysts said the growth in both services and manufacturing sectors is another sign that the British economy may be growing again after its deepest recession in decades.
British home prices also rose by 1.1 percent in July from June.
The U.S. Conference Board said last week that the Leading Economic Index for Britain increased by 1 percent in June, the third consecutive month of growing. The gain resulted from positive contributions from volume of expected output, consumer confidence, the yield spread and order book volume.
However, the Bank of England (BoE), Britain's central bank, has been cautious about the increasing "green shots" of economic recovery.
While keeping the short-term interest rates unchanged at its lowest level of 0.5 percent, the bank surprised the markets last Thursday by agreeing to provide an extra 50 billion pounds (83.5 billion U.S. dollars) of new money to the market even though it expected the recession to soon bottom out.
The BoE announced it would ramp up its so-called quantitative easing scheme -- whereby it buys bonds from commercial institutions -- from 125 billion pounds (208.75 billion dollars) to 175 billion pounds (292.25 billion dollars) after winning government approval. It also said in a statement that the country's recession "appears to have been deeper than previously thought."
"Business surveys suggest that the trough in output is close at hand," the BoE has said. But some analysts said the British economy is facing many uncertainties such as financial instability and loss of leverage in monetary policy.
And how to deal with the financial exit strategies is another difficulty for the British government and the central bank. If they exit too soon, the fragile economy could easily deteriorate again and lapse into another contraction. To exit too late will increase the risk of inflation and soaring government debt.
Many analysts including those at the International Monetary Fund and the Organization for Economic Cooperation and Development have predicted that the British economy would shrink more than 4 percent this year and grow at a speed under 0.5 percent in 2010.