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Britain's way out of recession remains clouded

Britain's progress out of recession remained clouded on Tuesday with improvements in retail sales and house prices overshadowed by warnings that business confidence remains frail and a drop in inflation to a five-year low.

business Updated: Oct 13, 2009 16:31 IST

Britain's progress out of recession remained clouded on Tuesday with improvements in retail sales and house prices overshadowed by warnings that business confidence remains frail and a drop in inflation to a five-year low. A survey of more than 5,500 firms across the country by the British Chambers of Commerce showed that several confidence indicators remained negative, casting doubt on expectations that Britain emerged from recession in the July to September quarter.

Britain officially entered recession at the turn of the year following two quarters of negative gross domestic product growth in the second half of 2008 _ the widely accepted definition of a recession.

Economists had expected GDP to return to growth in the July to September quarter after a 0.6 percent contraction between April and June.

"The third-quarter results support our assessment that the UK economy is on the brink of leaving recession," said BCC chief economist David Kern.

"However, the improvement is not sufficiently strong to allow us to conclude without doubt that GDP has already returned to positive growth," he added. "The economy is still frail." The BCC survey follows the release of data last week showing a surprise fall in industrial output in August, which prompted leading forecaster the National Institute of Economic and Social Research to revise its GDP growth estimate for June to September to zero percent.

Official GDP figures are due out next week.

Britain, one of the countries hardest hit by the global credit squeeze, is continuing to struggle as France, Germany and Japan make progress out of the downturn. Britain was affected particularly hard because of its huge financial sector and higher levels of personal debt among consumers.

That has made it harder for Britons to spend their way out of recession, and falling demand for goods and services now poses the threat of deflation _ a damaging downward spiral of falling prices and weakening spending.

Consumer prices rose 1.1 percent in September, the weakest rate in five years and lower than 1.6 percent the previous month, according to the Office for National Statistics. Economists were forecasting a 1.3 percent rate.

James Hughes, chief economist at Black Swan Capital Wealth Management, said the September figures showed that attempts by the Bank of England to boost the money supply via asset purchases had yet to take effect.

"Ordinarily when governments print money, sell bonds, nationalize banks and go on an enormous quantitative easing spree, the eventual outcome is inflation," Hughes said. "However, the U.K.'s problems, comprising a massive budget deficit, aging population, unsustainable welfare system and uncompetitive exchange rate, are so deep and fundamental that the increased money supply is not yet feeding through to prices, and may not do so for some time."

Many economists argue that the Bank of England should increase its so-called quantitative easing program to boost money supply at the risk of inflation, in order to avoid a deflation trap. A sustained fall in consumer price is considered dangerous for its potential spiral effect, known as deflation _ consumers put off purchases as they wait for prices to fall further, which reduces overall economic activity and investment. That in turn leads to further falls in demand.

There are some positive signs. House prices and retail sales both rose significantly in September, according to two closely watched surveys also released Tuesday.

The British Retail Consortium said that sales jumped 4.9 percent compared with a year ago. Sales excluding new store openings were up 2.8 percent.

The Royal Institution of Chartered Surveyors, meanwhile, reported that a lack of supply continues to underpin the house price recovery. It said the net balance of surveyors reporting house price rises rather than falls reached a positive reading of 22 in September, the highest figure since May 2007.

RICS spokesman Ian Perry said that a lack of supply and difficulties for first-time buyers in entering the market mean that house prices would continue to move higher "in the near term." However, the BRC noted that last month's retail sales figures contrasted with a particularly weak September last year, when sales fell 1.5 percent because of financial market turbulence and very wet weather.

"As we enter the important run-up to Christmas, these results give some room for optimism," said Stephen Robertson, the consortium's director general. "But consumer sentiment is volatile."