UK on the brink of double dip recession as inflation pressures mount

Disappointing growth in the UK indicates that the country has fallen back into recession after two successive quarters of decline. GDP declined by 0.2% in the First Quarter as the UK economy continues to contract. The recession is driven by a decline in the construction industry which has suffered significantly over recent months. Rising prices and increased austerity is having a negative impact on consumer spending. London however, is showing signs of resilience and has not fallen into decline compared to the rest of the country. 

Inflation rose to 3.5% in March and has exceeded the Bank of England’s target of 2%. Higher food and clothing prices were the key factors in March. The Bank has been struggling to contain inflation for the past 12 months following the increase in VAT to 20% combined with rising commodity prices and the weakness of Sterling.

A UK recovery will be slow in the making as companies hold back on investments due to fears over the future of the Eurozone. Companies are seeking to reduce their debt profile rather than investing in the current climate. Companies actually paid back more of their debts in February than the banks handed out in new loans. This startling statistic combined with reduced lending to small businesses in 2012 creates great concern over the growth prospects of the UK. 

Savers and investors have been unable to generate sufficient returns whilst interest rates remain at a historic low of 0.5%. These artificially low rates cannot be maintained indefinitely although any increase will further fuel inflation will further impact the recovery. Tough decisions need to be made as the government must find a way to promote inward investment and stimulate growth in the UK. 

The Conservative government appear to have studied the successful macro-economics employed in Sweden who managed to cut taxes and reduce their deficit at a time where the UK, Spain and Portugal were taking on increased debt.  Sweden discovered that economic recovery starts with entrepreneurs, a policy adopted in George Osborne’s latest Budget.