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No double-dip recession but interest rates will rise soon

Author: Michael Young
11 March 2011

The majority of the professional services community does not believe the UK will go back into recession, but 83% predict an interest rate rise within the next six months, according to a recent survey by FRP Advisory LLP, the specialist restructuring, recovery and insolvency firm with an office in the Northern Home Counties.

The survey, which was carried out in the last week of February, questioned more than 150 senior professionals at banks, commercial lenders, solicitors and accountants. When asked if they believe Quarter 1 2011 GDP figures - to be released at the end of April by the Office of National Statistics - will show a second consecutive quarter of decline, 55% of respondents answered no.

Commenting on the results, Michael Young, partner at FRP Advisory in the Northern Home Counties, said: "Although the majority of those surveyed do not believe we will see another decline in GDP, the question did almost divide respondents with a significant 45% believing the UK will go back into recession. This is very reflective of UK plc – on the one hand manufacturing performance has improved, while retail and the services sector continue to suffer."

Despite the Monetary Policy Committee (MPC) decision yesterday to maintain the 0.5% base rate, the vast majority of those surveyed - 83% - believe a rise will have to happen within six months, with 44% of those predicting an increase before June.

Michael Young continues: "This result isn't surprising given the level of pressure building on the MPC to raise interest rates. However many experts believe the underlying rate of inflation is still too low to warrant an increase in base rates. If you take out 'shock' factors such as the government VAT increase and spiraling commodity prices, the underlying rate directly related to consumer spending could be closer to the Bank of England's target of 2%.

"Anecdotal evidence suggests that although the professional community we surveyed predicts an interest rate rise is likely in the near future, opinion is very much divided as to whether this rise is appropriate. If the Bank does raise interest rates before June, it will be responding to adverse cost-related inflationary pressures, rather than demand-led pressure. Essentially, current inflation isn't a result of heightened consumer confidence and economic activity but rather the upshot of tax and commodity price increases, which are actually squeezing consumer spending."

ONS data released on 18 February showed retail sales had risen year-on-year by 5.3% in January versus January 2010, however British Retail Consortium Director General Stephen Robertson said that although the figures were strong superficially, they didn't indicate any permanent revival in customers' willingness to spend.*

"Additionally and rather worryingly, 75% of the professionals surveyed also felt that petrol prices at the pump will be higher in twelve months' time," continues Mike. "This indicates that it is unlikely that there will be any relief to current inflationary pressures from this source in the foreseeable future."

He concludes: "In raising the base rate, the Bank of England could be using an economic lever that may not be appropriate for the current problem. While UK business makes its slow progress out of recession and consumer confidence remains low, any increase in the cost of borrowing will surely have a detrimental effect on the tentative recovery."

* http://www.brc.org.uk/brc_news_detail.asp?id=1901&kCat=&kData=1

For further information, please contact Michael Young using the online form below.