U.K. Economy Is Gearing Up for Comeback, Capital Economics Says

Britain’s economy could be in line for a period of “strong catch-up growth” once it gets through the current weakness, according to Capital Economics Ltd.

Capital, founded by former U.K. Treasury adviser Roger Bootle, forecast today that the economy could grow at a 4 percent annual rate in the second half of the decade. It said the recession appears to have done little permanent damage and the economy should benefit as its supply potential recovers.

The optimistic outlook follows data showing the economy strengthened in the second quarter and marks a shift in tone for the often-pessimistic forecaster. In a Bloomberg News survey of economists last month, Capital projected 2013 U.K. growth of just 0.2 percent, the lowest among 47 estimates.

“Contrary to the popular belief that we are the eternal ‘Eeyores’ of the economics world, we believe that the U.K. economy could yet stage a strong comeback once the challenges of the next year or two are over,” Capital said, referring to the pessimistic donkey in A.A Milne’s Winnie-the-Pooh books.

In its latest forecasts, Capital sees the economy growing 0.8 percent this year and 1.5 percent in 2014. While gross domestic product is 15 percent below the level it would have reached under the pre-recession trend, Capital said its unlikely the recession permanently eliminated this much supply potential.

Growth could be bolstered “as these idle resources are fully utilized,” it said. “What’s more, we believe that the type of growth will be more favorable. With the manufacturing, energy and construction sectors leading the way, the economy should finally become better balanced.”

Confidence Rises

Separately today, BDO LLP said its indexes of U.K. business confidence and output both rose to 13-month highs in June. The sentiment gauge climbed for a fifth consecutive month to 94.3 from 93.6 in May, while a measure of output advanced to 94.9 from 94.4. Still, both indexes remain below the 95 threshold that indicates growth, BDO said.

In its analysis, Capital also cited the potential impact of new Bank of England Governor Mark Carney, whose arrival “could trigger more support from monetary policy.”

The BOE said July 4 it will keep interest rates at a record low for longer than investors had expected. The statement after Carney’s first policy meeting, followed a rout in global bond markets sparked by Federal Reserve Chairman Ben S. Bernanke’s comments on the U.S. central bank tapering its monthly stimulus.

“While it’s encouraging to see confidence continuing to improve, we should be mindful of the zig-zag trend that has characterized U.K. business confidence since 2008,” BDO partner Peter Hemington said. “The worry is financial market turmoil arising from the actions of the Federal Reserve will choke off yet another nascent U.K. recovery.”

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