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U.K. Economy Will Escape Recession in 2012, Osborne to Say

Chancellor of the Exchequer George Osborne will say in the budget this week that Britain will escape recession this year after a stronger-than-expected first quarter.

Economists at Royal Bank of Scotland Group Plc and Barclays Plc forecast gross domestic product expanded 0.3 percent between January and March, putting the economy on course for growth in 2012 of about 0.8 percent. In November, the Treasury’s fiscal watchdog predicted first-quarter growth of 0.1 percent and said the economy would expand 0.7 percent this year.

“The economy is looking marginally better: the euro area crisis has receded and the surveys seem to have got a bit better,” said Ross Walker, chief U.K. economist at RBS in London. “You could easily get 0.3 percent or 0.4 percent in the first quarter despite some uncertainty around the construction data.”

Surveys this month indicate that the U.K. economy returned to growth in the first quarter after a 0.2 percent contraction in the last three months of 2011. Reports from Markit showed manufacturing and services continued to expand in February, while GfK NOP’s consumer confidence index held at the highest since June.

Still, the euro-area debt crisis remains a threat, with Bank of England Deputy Governor Charlie Bean saying on Feb. 21 that the agreement on a second bailout for Greece may not be enough to end the turmoil. The euro crisis “represents the biggest downside risk” to the U.K., he said.

Rising Unemployment

While the growth outlook may improve, the Office for Budget Responsibility, the non-partisan body that prepares Osborne’s forecasts, is likely to show little improvement in the labor market with jobless claims seen reaching 1.75 million people this year.

Data last week showed claims rose more than economists forecast in February to 1.61 million and a broader measure of unemployment remained at the highest in 16 years, underscoring the weakness of the labor market.

Osborne is also likely to show that the budget deficit has improved, analysts say. Public-sector net borrowing will be about 125 billion pounds ($200 billion) in current fiscal year that ends this month rather than the 127 billion pounds forecast by the OBR in November, according to a survey of 27 analysts compiled by the Treasury last month.

“Recent news has been encouraging suggesting that the deficit could be somewhat lower than the OBR was forecasting three months ago,” George Buckley, chief U.K. economist at Deutsche Bank AG, said in a research note.

Less Borrowing

Morgan Stanley says the deficit is likely to improve next fiscal year to about 120 billion pounds. Osborne says warnings from rating companies that Britain risks losing its top grade reinforce the need to stick to his budget-cutting plans, which aim to eliminate the bulk of a deficit of 9 percent of economic output by 2017.

Fitch Ratings said last week that Britain has limited ability to deal with shocks and changed its outlook to “negative” from “stable,” indicating a “slightly greater” than 50 percent chance that the AAA rating will be reduced within two years

Moody’s Investors Service said last month that Britain risks losing its top-level rating if the economy deteriorates. Bank of England Governor Mervyn King said on Feb. 29 that the Moody’s warning was a “perfectly reasonable” assessment.

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