Cup half full or cup half empty? That’s the question posed this week as we listened to the soon-to-be outgoing governor of the Bank of England explaining its ‘Quarterly Inflation Report’. 

On the one hand low growth and prolonged inflation above 3% are predicted but he also signalled that the UK economy is now set for recovery but that this will not be smooth. No kidding! To be fair the inflation figures are due to specific price increases – tuition fees are a major factor – rather than more typical supply and demand inflationary pressures, while these latter are only likely to kick-in as the global economy recovers or poor food harvests push food prices upwards.  

Back to UK demand though, business investment may be improving but still lies well below peak levels, with poor visibility and uncertainty a deterrent, the government sector is well constrained as it seeks to reduce borrowings and the subsequent household squeeze leaves consumer demand growth pedestrian at best. This has led to another High Street retail casualty, Republic. As I said last month, I wouldn’t bet against more to follow.  

The preliminary estimate for Q4 GDP reports a decline of 0.3%, worse than expected, but again there were exceptionals and the underlying figure may be as good as -0.1%. In other words, adding up prior quarters shows that across the whole year economic output is pretty flat and apparently going nowhere very fast. There are some positives within the data which has been affected by a sharp contraction in the construction sector over the year and therefore seen more upbeat performances elsewhere, but at this stage that would be splitting hairs.   

Overall in the UK there are no real surprises and now we have some European comparisons, which confirm we really are all in it together. Eurozone figures are likely to show a further decline when published this week, signalled by Q4 figures for France which showed a 0.3% drop and flat over the whole year, while Germany reports a massive 0.6% shortfall as its exports fell, affected by a weak global economy and uncertainty-driven reduced investment levels. Nevertheless, forward purchasing surveys do suggest at least stabilisation in Germany, Spain and Italy with recovery anticipated in Germany although still negative in France. Q1 expectations for UK GDP are mixed but some rebound may well be likely, averting the infamous two quarters of decline that would make a triple dip recession. To quote Mervyn King again – “not a smooth recovery”.