British economic recovery faces inflation pressure in 2011

12:16, March 06, 2011      

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The British economy suffered more than most in the global financial crisis but enjoyed a healthy return to growth in 2010. However, 2011 looks to present challenges including rising inflation.

The economy was the last of the G20 national economies to come out of recession, in the final quarter of 2009, but then enjoyed four straight quarters of quite robust growth before slipping back into decline with a 0.6 percent fall in GDP in the final quarter of 2010.

That decline in Q4 2010 surprised commentators, and in part was attributable to unusually bad winter weather which disrupted production and delivery, as well as retail sales.

However, the decline did raise the prospect that the British economy could be vulnerable to stagflation -- stagnation in GDP with inflation in prices -- which would see real costs rising for businesses and individuals while growth declined and incomes saw their real value reduced year-on-year by inflation running ahead of wage settlements.

Peter Westaway, chief European economist at Nomura in London, told Xinhua Friday, "The problem is that the UK is currently suffering a number of shocks which are causing inflation to be temporarily higher. Indirect taxation has gone up, oil prices and food prices have been very strong as well. People's income gets eroded and that tends to slow the economy down relative to a situation where inflation wasn't picking up."

One of the problems of consistently over-target inflation is that wage bargainers and workers could begin to believe that there will be long-term high inflation and start to push for higher wage settlements to compensate, said Westaway. If the Bank of England ( BOE) thinks that, then it will want to raise interest rates.

Chris Williamson, chief economist at Markit, the financial information services company, also warned of the potential danger of wage inflation. "There are lots of pressures on the Bank of England to either increase interest rates or explain why it has not been raising them because inflation has been above target for quite some time now and it is beginning to lose its credibility," he told Xinhua.

"This risks consumer expectations of inflation increasing which will lead to more pay negotiation pressure. That's the big fear. It's a difficult situation but there is little information that pressure is gathering,"Williamson said.

Williamson added there was some evidence of wage pressures in manufacturing, but that was an area which was "growing at a very fast rate, the fastest in 20 or 30 years, but that's only 13 percent of the economy."

The Purchasing Managers Index figures indicated a robust growth in the British economy in February, coming on the back of a return to growth in January.

Taking into account the bounce given by a rebound from the poor December figures, leading economists now predict a 0.2 percent growth in the British economy for the first quarter of 2011.

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