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Upward Revision to GDP Doesn't Hide Underlying Economic Problems

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Wednesday's news from the ONS, which revealed that the UK's economy grew more than previously thought in 2012, has prompted some cautious some optimism after a tough few weeks for the UK. Growth throughout 2012 was actually 0.2%, following revisions to both Q1 and Q3 data.

Statistically this does mean that the fear factor surrounding the prospect of a 'double-dip' recession last year were very much overdone, much like the concern over a 'triple-dip' through Q1 of this year. However, the fact remains that the growth profile of the UK economy has been one of stagnation for basically three years now. Oscillations around the 0% growth mark are all much of a muchness; the trend is still one of negligible improvement.

Looking into these figures there are some good signs. A revision to construction sector growth to 0.9% from 0.3% is most welcome, and it goes along with an improving set of sector data which we've seen since Q3. Consumer spending rose by 0.2% and services overall were also revised higher by 0.1%. Unfortunately, all of this has been overshadowed by some awful trade figures. Export growth shrank by 1.5% while imports were 1.2% lower.

The recent depreciation of sterling is a good thing if you believe that a lower pound will lead to a rebalancing of the UK economy towards export growth. Exports can be made more attractive by pricing or by simply making products that are so much better than their competitors' that there is no choice to be made.

The Bank of England cannot engineer the latter and will instead go with the former of these two options. The problem is that this plan hasn't worked over the past four years and I would like to know why they think that this time will be any different. Metaphorically speaking, you can give an athlete great running spikes, but if he's half as fit as the competitors he's never going to win.

Regardless, they are certainly giving it their best shot it seems. The latest minutes from the Bank of England suggested that, alongside another round of quantitative easing, a cut in interest rates or a plan to invest in corporate debt may be forthcoming. The Deputy Governor, Paul Tucker, in testimony to the House of Commons Treasury Select Committee yesterday, twice mentioned the possibility of negative interest rates; a phenomenon where depositors would have to pay to hold money in a bank - a de facto incentive to spend and not save. A scary prospect, and although this is highly unlikely to happen, the damage to the pound was already done.

However, a fall in imports can also be tied back to the weaker pound as companies either seek cheaper local alternatives or, more likely, are importing less from abroad in reaction to lower demand from customers. Given we are an island nation, reliant on inward trade, the increased inflation from our imports will outweigh the benefit from exports massively.

Wednesday's figure has only really served to underline the general sloth of the UK economy and does nothing to change my expectation that the UK economy will grow by no more than 0.6% this year, which is hardly a cause for celebration.

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