UK recovery hopes grow as pain eases

Hugo Duncan
14 Jul 2009

The UK economy today showed tentative signs of stabilising if not recovering, as the Bank of England weighed up whether to print more money to drive demand.

A host of firms hit the buffers in the second quarter of the year, but the rate of distress showed signs of slowing. There were also indications the housing market and high street may have passed the worst of the recession.

Business recovery specialist Begbies Traynor said another 197,000 firms hit financial difficulty in the second quarter of the year - more than the 138,000 in the same period last year but less than the 229,000 in the first quarter of this year.

Ric Traynor, Begbies executive chairman, said: "The recession is likely to be prolonged, possibly more prolonged than the last recession, and there is no evidence yet of a real recovery emerging. However, the overall increase in the number of problem companies has undoubtedly slowed for the last two quarters."

On the High Street, the British Retail Consortium (BRC) said same-store sales were 1.4% higher last month than a year ago as hot weather boosted purchases of summer goods.

"June's sunshine gave overall sales a much-needed boost. The heatwave helped food retailers and got customers buying outdoor goods," said BRC director general Stephen Robertson.

But he added: "Given the uncertainty about jobs, customers are still nervous about spending on more expensive, non-essentials."

The Royal Institution of Chartered Surveyors reported growing optimism that house prices will go up in the short-term but warned there will be no "sustained" upturn until mortgages become more available.

City accounts at PricewaterhouseCoopers warned of further price falls this year and next.

"Despite some recent reports of rises, we are not out of the woods yet and buyers should take a long-term rather than short-term view," it said.

The Bank last week surprised the markets by not announcing an expansion of its £125 billion quantitative easing programme to help drive a recovery.

Charlie Bean, the Bank's deputy governor, said today the new money pumped into the economy since the scheme started in March will continue to stimulate demand even after the programme stops.

"The one thing I would like to stress is that we don't have to keep on making purchases for quantitative easing to have an effect. It is the total stock of purchases that matters," Bean said.

The Bank is due to review the scale of the programme next month and analysts are divided over whether the central bank will want to do more to pull the economy out of recession.

Bean said a key difficulty lay in gauging the effectiveness of the policy given its unprecedented nature and the time lag of six months to a year for it to affect the wider economy.

"It's most plausible to think that the first thing we will do is raise Bank rate and then sell the assets back over an appropriate timescale in light of market circumstances," he said.

Bean warned that withdrawing newly printed money from the economy too soon could send the UK back into freefall.

"We don't want to move too early, because we end up nipping a recovery in the bud, and if you look at the Japanese example they tightened prematurely and it pushed the economy back into a downturn," he said.

"But equally we won't want to leave it too long because it may let the inflationary cat out of the bag which would require us to tighten policy excessively thereafter."