Barclays Wealth

The Chief Economist at Barclays Wealth suggests a double-dip scenario cannot be completely ruled out

Michael Dicks, Chief Economist, Barclays Wealth puts the probability that the UK "double-dips"next year into recession at about one in three.  He believes three factors could prove particularly important;

• Fiscal tightening has a greater impact than generally expected. Look closely at the numbers, and you see that fiscal effort will jump by more than two percentage points next year, driven largely by the in-your-face hike in VAT, but also affected by other tax changes and by cuts in government spending and benefit payments. The OBR believes that GDP growth will take the smallest of possible impacts early next year when the VAT hike bites - of 0.1 percentage points (from 0.6% to 0.5%). But we suspect that the hit will be rather bigger than this, and perhaps a lot bigger.
• Exports might not provide much of a boost. The first concern is that, with everyone getting in on the fiscal tightening act, there won't be too many buoyant markets to export to, particularly on the continent. The second concern is that UK exporters seem to be less able to benefit from sterling depreciation than in the past, having a preference to boost margins rather than market share.
• Higher inflation might require higher interest rates. The general presumption is that tight fiscal policy will be offset by loose monetary policy for some time. However, inflation keeps surprising everyone on the high side -leaving one member of the Bank of England's MPC (Andrew Sentance) suggesting hiking rates. If an unexpected supply shock upped inflation again, then the majority of the committee might well decide to follow his advice. And that could easily translate into a very poor growth outlook for the UK.

Mike commented "All in all, we would say that it is more likely than not that the fiscal tightening takes the edge off of the recovery, rather than completely wrecking it. But, a double-dip scenario certainly cannot be completely ruled out."

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