LONDON — Britain is limping into the new year still officially in a recession as its recovery from the global credit crunch lags behind the United States, the European Union and just about every other major economy.
Modest growth is forecast for 2010, but convincing voters who is best to lead the long slog ahead will define Prime Minister Gordon Brown’s bid to win an increasingly closely contested general election.
The hesitant nature of Britain’s return to growth from its worst downturn since World War II was underscored last week by statistics showing that the economy shrank less than previously estimated in the third quarter but still fell short of economists’ expectations for improvement.
In its third and final revision for the July-to-September quarter, the Office for National Statistics reported that gross domestic product contracted 0.2 percent. That compares with a positive 2.2 percent for the United States during the quarter.
The British figure was better than earlier estimates that first put the contraction at 0.4 percent, then 0.3 percent, but worse than predictions ranging from a 0.1 percent shrinkage to a 0.2 percent expansion. A positive figure would have officially ended the recession.
“Serious economic and financial obstacles to significant, sustainable growth remain, and we suspect that recovery will be gradual and prone to losses of momentum,” said IHS Global Insight chief United Kingdom economist Howard Archer.
Brown’s Labor government is pegging its hopes for electoral success on its belief that the need to support economic recovery outweighs the immediate desire to decrease a burgeoning budget deficit.
It’s a strategy that provides a clear split with the main opposition Conservative party. Brown has acknowledged that Britons face a “profound choice” at the polls with “two competing visions about managing our economy through and out of recession, two competing visions about a fair society.”
The Conservatives want the blowout in the budget deficit to be addressed much quicker to prevent long-term damage to the economy and have already announced that they will hold an emergency budget session within 50 days of coming to power if they win the election, whichmust be held by June.
The International Monetary Fund expects Britain’s deficit to peak next year at 13.2 percent of gross domestic product, the highest level in the Group of 20 leading industrialized and emerging nations.
But even after a warning from Moody’s Investors Service that Britain needs to curb borrowing to keep its top-grade AAA rating, the government’s policy appears to be winning favor with voters.
An ICM Ltd. survey conducted in mid-December found that 31 percent of people supported Labor, compared with 40 percent for the Conservatives - a narrowing of 2 percentage points from a survey a month earlier.
Some analysts now suggest that a Labor victory isnot as impossible as thought just months ago or that a hung parliament is a possibility. Either outcome would be something of a vindication for Brown, the former Treasury chief who was hailed by other world leaders as the voice of reason at the start of the global credit crunch.
In contrast to his standing internationally, Brown, who succeeded Tony Blair to the top job in May 2007, found his reputation at home taking a battering as Britain was hit harder than other major economies. The country’s huge financial sector, where the government was forced to carry out a multibilliondollar bailout of major banks, higher levels of personal debt among consumers and collapsed real estate bubblewere a recipe for disaster.
Both the government and the Bank of England have forecast that Britain will officially pull out of recession in the current fourth quarter.
Alistair Darling, the chancellor of the exchequer, has forecast an annual contraction in the GDP this year of 4.75 percent, better than the 5.1 percent year-on-year measure resulting from the third-quarter revised figures. The Treasury chief expects growth next year of 1 percent to 1.5 percent and further growth of 3.5 percent in each of 2011 and 2012.
Economists agree that there is some upside after an unprecedented monetary expansion program from the Bank of England slashed interest rates to a record low of 0.5 percent and pumped $325 billion into the economy via an asset-purchase program.
But many believe that the official forecasts are still too rosy, with some economists suggesting that the economy will struggle to grow just 1 percent next year.
The Confederation of British Industry, the country’s leading business lobby group, puts growth at 1.2 percent for next year and 2.5 percent in 2011, which would be insufficient to return Britain to its pre-recession growth rate by the end of that year.
The confederation also warns that workers should be braced for more job losses and pay freezes next year.
And beyond the election, there’s a growing awareness that - whichever party wins - ordinary Britons are likely to bear a greater cost for the excesses of recent years in the form of unpopular taxes and spending curbs.
“With household debt still very high, credit constrained and a fiscal squeeze looming, the economy still has a lot to contend with,”said Jonathan Loynes, chief European economist at Capital Economics.
Business, Pages 50 on 12/27/2009