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No relapse into recession seen

Source: Reuters - Tue 20th Jul 2010

With consumer price growth staying stubbornly high over the last quarter, forecasters upped their inflation predictions.

The UK economy will likely gain between 0.4 and 0.6 percentage points of gross domestic product in each quarter over the next 18 months, median forecasts showed, with a one-in-five chance of relapsing into recession over the next year.

Analysts in the June UK economy poll, taken in the immediate aftermath of the June 10 budget, gave a one-in-four chance of a double-dip recession.

Last month new Chancellor George Osborne unveiled the toughest budget in a generation, designed to slash Britain's budget deficit with spending cuts and sales tax hikes.

It contained UK growth forecasts of 1.2 percent this year - matching the consensus in the latest Reuters poll - and 2.3 percent for next year. Median predictions suggested that might be a little optimistic, with economists predicting growth of only 2.0 percent in 2011.

"We continue to expect a gradual recovery in the UK economy, but risks are weighted to the downside" said John Hawksworth at Pricewaterhouse Coopers, who cut his 2011 growth forecast from 2.5 percent to 2.2 percent to reflect the austere budget.

"We expect public sector job cuts to dampen the economic recovery, but not to derail it altogether."

Osborne said many government departments could expect cuts of 25 percent over the next four years and figures from the new independent Office for Budget Responsibility showed his plan would cost around 600,000 public sector jobs by 2016.

Still, the latest Reuters poll showed the unemployment rate steady at around 8.0 percent until the end of next year under the International Labour Organisation method, broadly similar to the last quarterly UK economy poll taken in April before the election.

On Wednesday, after completion of the polling, official statistics showed the number of Britons claiming jobless benefit fell slightly more than expected, with the ILO unemployment rate falling to 7.8 percent - the lowest since January.


There was a marked upwards revision to economists' inflation forecasts. Over the last quarter, consumer price inflation has consistently overshot both analyst expectations and the Bank of England's 2 percent target by a wide margin.

Bank of England Governor Mervyn King has been steadfast in his view that inflation will drop once old tax and oil price hikes have fallen out of the annual comparison, but the poll suggested economists think otherwise.

Median forecasts showed CPI inflation floating above the BoE's 2 percent target through to the end of next year, by which time it is seen easing to 2.3 percent.

That was a big shift from June's poll, which saw inflation dipping below target as early as the second quarter next year.

On Tuesday, the UK statistics office said CPI inflation fell to 3.2 percent in June from 3.4 percent in May..

"This may trouble MPC members, some already fretting over elevated inflation expectations, and while we expect no change this year, the Bank of England could be the next major monetary authority to tighten policy," said David Page of Investec.

Forecasters saw the Bank waiting until the second quarter of next year before hiking interest rates - in line with Reuters' BoE poll of two weeks ago.

"We maintain the view that the BoE is more likely than not to keep interest rates down at 0.50 percent into 2011 as recovery remains bumpy and gradual with major fiscal tightening and the euro zone's problems posing serious threats to UK growth prospects" said Howard Archer of IHS Global Insight.

The euro zone economy will grow at a slower pace than Britain's over the next year-and-a-half as austerity measures and a sovereign debt confidence crisis rumble onwards, a Reuters poll on the 16-nation bloc showed.

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