UK avoids triple-dip recession

Initial estimates for Q1 GDP show the UK narrowly avoided an unprecedented triple-dip recession. UK output expanded by 0.3% in the three months to March, having contracted by 0.3% the previous three months. The reading was stronger than expected - according to the Bloomberg consensus, the city was expecting growth of just 0.1%.
 
The news of having avoided a triple-dip recession will come as a relief for the Chancellor George Osborne who was recently told by the IMF that a change of course on his austerity plans may be necessary. In our view, the government has done well not to chase aggressive fiscal targets when it has missed them, but instead try to maintain some momentum in the reforms of public services. Nevertheless, the government should be using near historic low interest rates to undertake huge multi-decade infrastructure investment projects, which the UK desperately needs to unlock its future growth potential.
 
Overall, regardless of the political points scoring that will follow, the figures confirm what we have known for some time. The UK economy is facing severe headwinds with the household sector, banking sector and government all trying to deleverage at the same time. Meanwhile, the non-banking corporate sector - the only healthy part of the economy - has been shaken by the crisis in the Eurozone. As a result, the economy is barely generating any growth at all.
 
Looking ahead, we expect the UK economy to pick up in the second half of the year on the back of stronger corporate investment. However, the key threat in the near term is the faltering Eurozone economy - the UK's biggest export destination. Political instability coupled with severe austerity is damaging confidence in the Eurozone, and having a knock on impact on UK exporters. We expect the Bank of England to respond with another £25-50 billion of quantitative easing in May, which will complement the expansion of the funding for lending scheme.

By Azad Zangana, Schroders'  European Economist.