British economy expands at fastest since 2001

28th September 2010, Comments 0 comments

The British economy grew at the fastest rate for nine years in the second quarter, data confirmed on Tuesday, one day after the IMF praised the government's plans to rapidly slash the public deficit.

Gross domestic product expanded 1.2 percent in the April-June period, the Office for National Statistics said in a statement. That was the best performance since the first quarter of 2001 and in line with expectations.

Analysts however warned of a difficult future for Britain's economy after recession as the coalition government prepares severe cuts in state spending alongside higher taxes.

A key Bank of England policymaker meanwhile said Tuesday that the central bank should consider pumping more money into the economy to bolster the recovery.

The International Monetary Fund on Monday backed the Conservative-Liberal Democrat government's deficit-slashing policy, describing the swift and aggressive measures as an "essential" weapon in reducing debt.

The IMF said Britain's economy "is on the mend" but nonetheless cut its 2011 growth forecast for the country to 2.0 percent from a previous estimate of 2.1 percent.

British finance minister George Osborne seized on the IMF report, saying it was a "very welcome endorsement" of his strategy. Osborne is set to announce details of deep cuts to state budgets on October 20.

Analysts said they expected growth to now slow, especially with the government cutting back so sharply.

"The second-quarter growth pace is clearly unsustainable in the face of major headwinds, most notably including tight fiscal policy ... slowing global growth and pressurized consumers," IHS Global Insight economist Howard Archer said on Tuesday.

Meanwhile Adam Posen, a member of the nine-strong Bank of England (BoE) Monetary Policy Committee, told a business audience in Hull, northern England, that fresh stimulus measures were needed to support the recovery.

Earlier this month, the MPC voted to keep interest rates at a record-low 0.50 percent and opted against altering its bond purchasing programme, widely referred to as quantitative easing (QE).

"I am comfortable with the idea that in the UK, if not elsewhere, additional monetary stimulus at this point should begin in the form of additional QE as the BoE pursued by purchasing gilts in 2009/2010," Posen said.

In March 2009, the BoE slashed interest rates to the record low 0.50 percent and launched QE in an attempt to drag Britain out of a deep recession. The economy escaped the downturn late last year.

Under QE, the BoE bought 200 billion pounds (320 billion dollars) of bonds from commercial institutions in the hope the commercial banks would then use the money to increase lending, thereby boosting the economy. The scheme ended in February.

The coalition, led by Prime Minister David Cameron's Conservatives, inherited a record 154.7-billion-pound (240-billion-dollar) deficit from the previous Labour administration which it ousted at a recent general election.

The main opposition Labour party, looking to win back power under new leader Ed Miliband, says the deficit-reduction plan is far too quick and aggressive and risks plunging Britain back into recession.

© 2010 AFP

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