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Why UK growth could surprise on the upside

Kathleen Brooks, Director of Research UK,

This week we will get some important signals from the UK economy including retail sales and inflation.

A few weeks ago it was a near certainty that the UK would slip back into recession after registering negative growth at the end of last year, however like a phoenix rising out of the ashes the UK economy has started to show signs of life once more.

There have already been lots of write-ups about the upward surprises to the manufacturing and services survey data for March, along with encouraging signals from the housing market and even a mini-boom in retail sales last month. But the more interesting question to ask is what has caused this uneven bout of data?

The good news

There are three main factors that have worked in the UK’s favour in the first three months of the year.

Firstly, the weather. It was a surprisingly mild winter and March was an absolute treat. The warmer weather meant that we had to discard that winter coat and bring forward our plans to buy the spring mac, shorts and even sandals.

This may have been a tad early (April has been disappointing so far) and the shorts may be at the back of the wardrobe once more, but the money has been spent, which is good news for the UK’s  retailers.

John Lewis recorded its strongest March sales ever last month, boosted by the timing of mother’s day and an earlier Easter. These days Easter is becoming like Christmas – you can buy cards, cakes and other Easter gifts that I don’t ever remember receiving when I was growing up in the 1980s.

The “consumerisation” of Easter may be concerning to some but not to retailers who gleefully rub their hands together at the prospect of more sales.

The second is the eurozone debt crisis. How can this be good news for our economy, you may ask. Over the past 12 months the UK has been treated like a safe haven as eurozone concerns have continued to flare up.

Investors’ are concerned about the long-term prospects for Europe and are taking their money out of the currency bloc and putting it in the UK. Now the UK may not be the “safest” part of Europe – the Scandinavian countries are in much better financial shape than we are – but we have a deep and liquid Gilt market that they don’t.

When crises strikes investors want to put their money in the most liquid place possible as they may want to get it out quickly and this is benefitting the UK and keeping interest rates low.

[Related story: Pound hits 19-month high against the euro]

This filters down to the real economy in a couple of ways: firstly, talk of us being a “safe haven” in the media can boost confidence. This can keep the consumer mood upbeat, which can help boost retail sales.

Everyone knows that the UK is not doing well, however, we do seem to be in better shape than some other countries’ and we have managed to hold onto our triple A credit rating unlike the US and France.

Efforts by the European authorities to sort out the sovereign debt crisis may have also helped our economy (albeit temporarily) last quarter.

At the end of 2011 the eurozone crisis was moving into critical territory. After some remedial action things have stabilised. Although we believe the sovereign debt crisis is a chronic problem the fact that the ECB and the EU authorities acted to stem the crisis in November 2011 suggests they will do so again if things get really bad in the coming weeks.

This is how central banks and governments can impact the markets- through confidence. Confidence is the bed rock on which economies can grow and stock markets can rise. Thus, central bank action in the currency bloc may have had a positive effect on the UK economy.

America and us

The last reason the UK may have avoided recession is down to the US. The US economy proved remarkably resilient in recent months even as China slowed and Europe contracted.

When the US is doing well that can rub off on other economies like the UK. A stronger US is good news for exporters of both goods and services in the UK.

Added to that, UK investors hold a sizable amount of US equities in their portfolios so what is good for the US economy is good for stock prices and can help boost the feel-good factor across the pond.

Intangibly important

A lot of people think that economic growth is about tangibles – things you can touch. However, that could not be further from the truth.

It is actually all about the intangible things like confidence and how people feel. Our economy is a vast eco-system, thus even though we are going through the most harsh period of austerity it doesn’t mean that economic growth will go up or down in a straight line.

At the start of this year it looked like confidence picked up a bit from the last three months of Q4. That could be enough to keep us out of recession for now, but we won’t find out until the first quarter GDP figures are released on 25th April.

But as mentioned above, confidence is delicate. The good news could soon be forgotten if the eurozone sovereign crisis engulfs Spain in the coming weeks. Closer to home concerns are bound to grow about whether the extra bank holiday for the Queen’s Jubilee in June will impact growth. So regardless of the Q1 figures, expect a roller coaster ride for the next few months.

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