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P 011520Z MAY 09
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INFO RUCNMEM/EU MEMBER STATES COLLECTIVE PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY
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RUEHED/AMCONSUL EDINBURGH 1119

UNCLAS SECTION 01 OF 02 LONDON 001040 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EFIN ECON ETRD EINV UK
SUBJECT: FAINT SIGNS OF SPRING, BUT ECONOMIC RECOVERY IN U.K. AT 
LEAST 12 MONTHS AWAY 
 
REF LONDON 0949 
 
LONDON 00001040  001.2 OF 002 
 
 
¶1. (SBU) Summary:  UK Government officials have been increasingly 
optimistic in their outlooks for economic recovery. Business 
Secretary Peter Mandelson, said he sees "green seedlings" in the 
British economy, while Chancellor Alistair Darling forecast positive 
growth figures by the end of the year in his 2009 Budget (Reftel). 
Think-tanks, industry groups and private firms also note glimmers of 
recovery.  "The worst of the recession may well be behind us," said 
Morgan Stanley economist David Miles, recently designated to join 
the Bank of England's Monetary Policy Committee in June.  Signs of 
recovery include the easing of credit markets, a slight uptick in 
consumer spending, and a boost in exports.  The UK economy is far 
from smooth sailing, however, and even optimistic experts predict at 
least 12 more months of tough times followed by a slow and fragile 
recovery starting in spring 2010.  End summary. 
 
Signs of Stability in Credit Markets 
------------------------------------- 
 
¶2. (SBU) UK monetary policies, including dramatically lower interest 
rates, the Asset Purchase Scheme and quantitative easing, appear to 
be making a slow but noticeable impact on credit markets and lender 
confidence.  One indication of this is the three-month London 
Interbank Offered Rate (LIBOR), which has fallen from almost four 
percent at the beginning of December 2008 to 1.45 percent.  LIBOR is 
the rate at which banks lend to each other and is also used as a 
basis to set interest rates for business loans and mortgages.  With 
banks lending to each other at cheaper rates, access to credit for 
businesses is improving and household credit is expected to follow. 
 
 
¶3. (U) The Bank of England Growth 2009 Q1 Credit Conditions Survey 
also highlighted evidence of easing in corporate credit markets, 
with lenders stating they expected to lend more in the next three 
months because of cheaper costs of borrowing and greater 
availability of funds.  The survey found overall corporate credit 
availability as reported by firms had increased in the last three 
months to mid-March.  Major lenders expected the availability of 
credit to the corporate sector to increase over the next three 
months.  The Confederation of British Industry's (CBI) latest credit 
conditions survey, published April 20, further showed companies were 
less negative about the availability of new and existing credit in 
March than they were in February.  Only 36 percent believed the 
availability of new credit had deteriorated in the past three 
months, compared with 59 percent in February.  Commenting on the 
survey in the press, Ian McCafferty, CBI's chief economic adviser 
said, "the view that the pace of deterioration is easing correlates 
with what businesses are starting to tell us on the ground.  Firms 
are not saying that credit conditions are getting better, but the 
severity of the disruption is no longer worsening as sharply as it 
was three months ago.  And the combination of easier monetary policy 
and the Government's measures to support the banking sector may be 
starting to have an impact." 
 
¶4. (U) Banks and building societies are also slowly opening their 
doors to new lending.  At its annual shareholder's meeting, Barclays 
Bank announced plans to increase lending to UK households and 
businesses by GBP 11bn this year.  This is in addition to previous 
commitments from Northern Rock, Royal Bank of Scotland (RBS) and 
Lloyds Banking Group to increase lending by a total of GBP 17bn.  Of 
the GBP 17bn, RBS agreed to lend GBP 9bn and Lloyds GBP 3bn as a 
condition for participating in the Asset Protection Scheme. 
Northern Rock, nationalized in February 2008, stated it would lend 
GBP 5bn in 2009 and GBP 9bn in 2010.  January to March 2009 figures, 
however, show gross lending totaled just GBP 33bn, down 52 percent 
year-on-year. 
 
Consumer Spending and Confidence Up 
----------------------------------- 
 
¶5. (U) Goldman Sachs economists now think the worst is over for UK 
consumer spending. "Consumers will begin to see some benefits from 
the recently enacted fiscal package, which should help ease the 
tight budget constraints imposed by the labor market deterioration," 
Goldman economists said in a recent report.  They also noted an 
easing in credit markets which had hampered consumption in late 
¶2008.  Goldman expects consumer spending to begin increasing in the 
second quarter of 2009 and see economic growth returning in the 
third quarter. 
 
¶6. (U) Supporting this, March 2009 data from the Office for National 
Statistics (ONS) also showed a small rise in retail sales volumes, 
though the ONS attributed this mainly to unseasonably good spring 
weather.  Retail sales volumes in March were 0.3 percent higher than 
in February when sales fell by 2 percent and they were 1.5 percent 
higher than a year ago. Clothing, footwear and textile sales grew 
 
LONDON 00001040  002.2 OF 002 
 
 
8.4 percent year-on-year in March, with the three-month figures 
showing clothing sales reaching their highest level in more than 
eight years. Most analysts cautioned, however, that one month was 
not enough data for a clear trend. 
 
¶7.  (U) On April 28, the Conference Board Consumer Research Center 
also released a report showing its consumer confidence index had 
increased by much more than economists had expected.  Its consumer 
confidence index jumped to 39.2 in April, up from 26.9 in March. 
Economists had expected the index to increase to only 29.7.  The 
Center's measure of consumer expectations also surged up to 49.5 
from 30.2, suggesting consumers believe the economy is nearing a 
bottom.  The Director of the Consumer Board said, however, "the 
index still remains well below levels associated with strong 
economic growth." 
 
UK Exporters Aided By Weak Pound 
--------------------------------- 
 
¶8. (U) A steep depreciation of the British pound sterling of nearly 
30 percent since its peak in 2007 is starting to help exporters, 
according to a manufacturing survey published by the Chartered 
Institute of Purchasing and Supply.  The UK saw a big jump in 
exports, up 12.8 from January to February, on the back of a weaker 
pound.  This jump triggered a sharp drop in the UK's trade deficit 
with non-EU countries.  The UK's trade deficit with the U.S. shrank 
by 28.3 percent to its smallest level since November 1999.  Improved 
exports have provided some relief for struggling manufacturers 
facing reduced domestic demand.  The weak sterling is also squeezing 
imports, which dropped 5.4 percent from January to February, 
improving the balance of trade and producing a positive contribution 
to growth.  Despite the boost from a weakening currency, UK 
manufacturing output is declining, falling 13.8 percent in the year 
to February 2009, but official data indicates the pace of decline 
has slowed. 
 
Expect a Long Fragile Recovery, Not Green Shoots Growth 
---------------------------- -------------------------- 
 
¶9. (SBU) Despite some positive indicators, the UK economy is far 
from "green shoots" growth.  While HM Treasury predicts positive GDP 
growth of 1.25 percent in 2010, other forecasts are more cautious. 
The most dismal is the IMF's recent report which predicts the 
British economy will shrink 4.1 per cent this year and 0.4 percent 
in 2010 before perhaps emerging from recession in 2011 (Reftel). 
Moreover, the UK unemployment rate continues a steady climb, hitting 
6.7 percent in February - a ten-year high.  The Confederation of 
British Industries expects unemployment will peak at 10.3 percent in 
the second quarter of 2010.  Not surprisingly, areas that have 
experienced the highest rates of unemployment and biggest jumps in 
the numbers claiming jobseekers' benefits are traditional 
manufacturing and heavy industry centers.  Newspapers also report 
recent university graduates are finding it particularly difficult to 
find jobs.  Additionally, the FTSE 100 remains volatile, showing 
investors are still unsure whether the UK is on the road to 
recovery.  In the Ernst & Young ITEM Club Spring forecast Peter 
Spencer, chief economic adviser, said: "Although one or two positive 
signs have started to appear, we face another 12 to 18 months of 
serious grief."  The Council of Mortgage Lenders has also stated 
that while there are signs of improvement in the housing market, 
they do not see a trend towards sustained recovery. 
 
¶10.  (SBU) Comment: While "green shoots" has become a popular buzz 
word, most of the positive signs have been based on just a few 
statistics viewed in isolation from general economic conditions.  A 
more accurate assessment may be that the pace of decline in the UK 
economy is slowing.  The UK's recovery could well take longer if 
global demand, international trade and global economic growth do not 
recover as quickly as expected or if additional skeletons come out 
from the financial sector's closets.  While surveys show consumers 
are gaining confidence, rising unemployment rates and job 
uncertainty are likely to impact consumer spending and lead to 
higher savings rates. 
 
TOKOLA