There is plenty of warning that the economy is facing a tough time during the rest of the year and may see a 'double dip' downturn, but is this likely? And what are the options for your money if the UK’s economy does shrink again?
External member of the Bank of England’s Monetary Policy Committee, Professor Martin Weale, director of the National Institute of Economic and Social Research (NIESR), voiced his concern this month in an interview with the Times newspaper, saying a ‘double dip’ downturn – where economic recovery after a recession is quickly followed by another downturn in growth – could not be ruled out.
Weale’s NIESR colleague Simon Kirby echoed some of his analysis, that there are significant risks facing the UK economy, but cautioned against a focus on whether the economy will shrink.
Kirby, a research fellow at the NIESR, said the 1.2 per cent GDP growth for the UK in the second quarter of 2010 was ‘phenomenally strong’ but it was unlikely to be continued into the rest of the year.
"The focus is quite a lot on a double dip which to some extent takes people away from what they should be focussing on, that we are likely to see a prolonged period of weak growth," he said.
The chief executive of multi-sector group the Co-operative, while not predicting a return to recession, has also predicted that tough economic conditions will persist into late 2011.
Announcing half-year results that showed a 34 per cent jump in the operating profit of the group's financial services business, Peter Marks said: "As anticipated, 2010 has been challenging so far, with tough economic conditions across all our businesses. Looking ahead, however, we do not expect things to improve until late 2011 at the earliest."
Drags on the economy
Simon Kirby believes many of the sectors that were instrumental in delivering the impressive economic growth between April and June were unlikely to continue to have such an impact.
"Government spending made a positive contribution to growth and we know that’s definitely going to stop, this will become a drag on spending. There is also real uncertainty around consumer spending going forward and we wouldn’t expect the strong contribution it has made to carry-on."
The Index of Services published at the same time as the GDP figures by the Office for National Statistics, showed a 0.5 per cent decrease in output from the services sector between May and June, which Kirby also said was significant.
At the same time, attempts to re-balance the economy and increase exports from Britain as a way to drive economic growth have failed to materialise. The manufacturing sector did not grow at all in the second quarter of 2010.
"The contribution from manufacturing was disappointing, especially given the depreciation of sterling. We would have expected that to have fed through and seen evidence of that in the exports," Kirby added.
The trade deficit – the disparity between UK imports and exports – did see some improvement, due to a smaller increase in imports compared to exports.
With real fears of a double-dip in the American economy and the predictions of a drawn-out weak growth in the UK, the stock market has experienced significant volatility as investors remain concerned.
Investing in equity, therefore, carries significant risks with share prices experiencing swings in value.
Other options for investors seeking a return include investigating the use of structured products, which are typically fixed-term investments, offering different levels of protection for the initial amount invested.
Some of the market-leading deposit accounts currently offer high interest rates which beat the affects of inflation.
With the latest inflation rate just over 3.1 per cent, driving up prices, look out for the longer, fixed-term accounts which offer savers enough of a return to protect the value of their savings.
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