The near-term outlook for the economy has improved but there
remains a huge amount of uncertainty about what shape the recovery
will take, according to Roger Bootle, economic adviser to
Deloitte.
Mr Bootle said at least three key factors have driven the recent
improvement in the economic indicators but none seem to set the
stage for a sustainable and strong recovery. Instead, he warned
that the recovery would be "sluggish and protracted".
He said: "Financial sector confidence, particularly in the
banking sector, has improved but this could easily be dented again
as banks still face a raft of recession-related losses.
"The turn in the inventory cycle and an easing in the pace of
de-stocking will boost growth for at most a couple of quarters, and
the massive boost from fiscal and monetary policy is coming to an
end. In addition, the effects of quantitative easing have so far
been far from spectacular and a severe fiscal tightening is looming
after the general election.
"Of course, something else could take over in driving the
upturn, but it is hard to see what. Slowing pay growth is largely
offsetting any boost falling inflation was giving to households'
real incomes, and the real benefit from the lower pound is unlikely
to be felt until global demand strengthens
significantly."
Mr Bootle said under the Government's current plans, public
sector debt as a share of GDP will not fall back below the 40 per
cent ceiling previously specified by the fiscal plans until 2035.
Just to get debt below 40 per cent by 2017 would mean cutting real
spending by two per cent per annum - and knocking 0.7 per cent off
annual GDP growth in the process.
"Even if the economy's potential growth rate has been damaged by
the recession, growth is unlikely to be strong enough to eliminate
the large amount of spare capacity that has built up," he said.
"Deflation, rather than inflation, therefore remains the bigger
risk. My mainconcern is the slowdown in wages growth. With
unemployment set to rise by another one million or so, pay growth
will slow further.
"The upshot is that there are still a number of reasons to be
cautious over the medium-term outlook. At least the economy looks
likely to be growing next year - an improvement on the outlook just
a few weeks ago."
Despite improvements, Mr Bootle said he expected modest growth
of just 0.5 per cent. In 2011 he predicts growth will be a
lacklustre 1.5 per cent.
"It is important not to forget that the UK is emerging, not from
a normal recession, but from a recession caused by a banking
crisis," he said.
"Credit remains a big problem, both its supply and demand. It
could take years both for banks' risk appetite to return and for
firms and, in particular, households to deleverage and want to
borrow more.
"We are therefore likely to see a much weaker economy than those
typically seen after previous recessions. What's more, it is not
impossible that the economy slips back into recession."