Green shoots, but not out of the woods yet

The UK economic recovery feels tense and insecure, as tax increases and inflation bite into people's real income and public-spending cuts take effect in the coming year. But recoveries from recession always feel uneven at this stage of the cycle, for while there is overall growth, some parts of the economy are liable to lag behind others. It is even possible that, for a few months at least, growth may falter.

The closest experience that the UK has had in past recessions was in the early 1980s. Those of the 1970s and 1990s were relatively mild by comparison while the recession of the 1930s was clearly worse. Actually, if you take out the boost in the early 1980s that came from North Sea oil, that recession was slightly deeper than our experience now.

So, how are we really doing? The National Institute's chart, which compares these different recessions by looking at the fall in output from the peak, shows that we are now a touch above the 1980s profile. That is reassuring. But quite often there is a blip in growth, for recoveries are rarely straight-line. Even if the present recovery does continue reasonably steadily it will still be well into 2012 before the economy gets back to its previous peak.

Growth was somewhat higher than people expected at the beginning of 2010: around 1.8 per cent instead of 1.3 per cent. Most forecasts are for growth of around 2 per cent this year. It may be that, again, things will surprise on the upside but there are a number of reasons for caution. The most obvious is the impact of higher taxation. It is too early to know how the rise in VAT will effect retail sales; the latest figures are distorted by the snow in December. Public-sector job cuts will also depress overall demand – it will be tough to expect the private sector to increase employment by enough to take up the slack. In any case, fiscal retrenchment has hardly begun. So far, despite the rhetoric, the fiscal deficit has barely been cut at all: public borrowing is almost exactly the same as it was in the previous financial year. So there is a long way to go.

Further concerns come from rising prices, with inflation set to climb further, driven by rising import and raw material costs. At some stage in the year, it seems inevitable that interest rates will go up, though it would be sensible to ignore "interest rates set to soar" headlines. Even if rates go to, say, 1.5 per cent, that's still very low by historical standards and far below the rate of inflation.

There are some positives. Global growth is still strong and UK exporters are optimistic about their prospects. The core continental economies, particularly Germany, are growing well, and only the smaller ones are in serious debt trouble. The fact that sterling is relatively low has made the UK more competitive and the result, in terms of tourism, is already evident. Inward investment is still strong, too.

So, while the recovery feels uncertain, it would be astounding if there wasn't reasonable growth this year. But it won't feel great, for much of that growth will go towards paying back debts – that applies as much to the Government as it does families carrying too big a debit on their credit cards.

Inflation Hit 3.7 per cent in December and is expected to rise

Andrew Pipe

Senior economic adviser for Lloyds Banking Group

Inflation is going to rise above 4 per cent in January. That's bad because real incomes are likely to fall.

Phil Thornton

Lead consultant for Clarity Economics

It's high and rising, probably going above 4 per cent soon. This is largely due to imported costs rather than inflationary overheating in the economy.

Jonathan Loynes

Economist for Capital Economics

The spike in inflation may reflect retailers who have already put up prices. But there still may be a lot more to come.

Michael Taylor

Senior economist at Lombard Street Research

Inflation is going over 4 per cent in the near term. It should come down later on but I fear it's going to stay too high, and the Bank will have to respond.

John Hawksworth

Chief economist at PricewaterhouseCoopers

You can explain what happened last week as one-off factors, like food prices. It will go up probably above 4 per cent in January because of VAT rises.

Ian Mcafferty

CBI, Chief economic adviser

In the short-term I think it will climb in January and February because of the VAT rise. We believe it will gradually for the rest of the year.

Alistair Darling

Former Chancellor

It is a concern that inflation has been above the Bank of England's target far longer than anyone expected. The Bank ought to hold its nerve.

Nida Ali

Economist at Ernst & Young

It's going to be difficult over the next few months for the Bank to balance the very high level of inflation now with what's needed in terms of policy.

Michael Dicks

Chief economist at Barclays Wealth

More worrying is the repeated surprises from the Bank of England. For the fifth quarter in a row they have come up with reasons for a hike.

David Kern

Chief economist at the British Chamber of Commerce

Inflation will worsen to 4 per cent, but it is temporary. It's going to be uncomfortable but it will be on the way down a year from now.

Unemployment Rose to almost 2.5 million in November and is increasing

Andrew Pipe

Senior economic adviser for Lloyds Banking Group

Unemployment is drifting up again. The private sector will offset public-sector cuts, so expect a small increase to just over 8 per cent this year.

Phil Thornton

Lead consultant for Clarity Economics

The greatest danger for the UK economy. Once the public-sector job and wider spending cuts kick in, it's likely to rise towards 2.75 million.

Jonathan Loynes

Economist for Capital Economics

The recovery is struggling to create jobs. The claimant count fell, but the wider International Labour Organisation recorded a rise in November.

Michael Taylor

Senior economist at Lombard Street Research

Unemployment may rise slightly but I am optimistic the private sector will offset any loss of public-sector jobs, but it may be better than expected.

John Hawksworth

Chief economist at PricewaterhouseCoopers

There's a strong upward trend in long-term unemployment, up by 200,000. It's a concern when people get detached from the labour market.

Ian Mcafferty

CBI, Chief economic adviser

We probably haven't seen the peak in unemployment. The numbers will be choppy and unemployment will rise in 2011, given slow economic recovery.

Alistair Darling

Former Chancellor

Rising unemployment is going to get worse. The latest statistics show that one in five under the age of 25 is out of work. That's very, very worrying.

Nida Ali

Economist at Ernst & Young

Most look at the claimant count but it's a red herring. There's a big decline in employment, suggesting last year's improvement has petered out.

Michael Dicks

Chief economist at Barclays Wealth

Employers held on to workers through the crisis – labour hoarding – to see if the pain was short lived. But we are starting to see job losses.

David Kern

Chief economist at the British Chamber of Commerce

My forecast is that it will rise by 100,000 people from now. Again, next year it will come down but initially it will increase.

Petrol prices In the fastest rise for 10 years, it has hit a new record of 128.77p a litre

Andrew Pipe

Senior economic adviser for Lloyds Banking Group

Oil prices are up about 25 per cent driven through a strong global recovery, but global growth will sag. I'd expect petrol prices to flatten off.

Phil Thornton

Lead consultant for Clarity Economics

There are signs that Opec, the oil producers' cartel, will stem the rise in crude prices, although high duty rates will keep prices closer to £1.20.

Jonathan Loynes

Economist for Capital Economics

The pass route from oil prices through to pump prices is pretty fast and is also reflected in gas and electricity. We will see the effects in the next few months.

Michael Taylor

Senior economist at Lombard Street Research

The global economy may well do quite well this year, especially the US, which is the biggest consumer of oil. That could push petrol prices even higher.

John Hawksworth

Chief economist at PricewaterhouseCoopers

It does have negative impact on the economy as it hits costs, squeezes consumers and affects business energy costs and could dampen growth.

Ian Mcafferty

CBI, Chief economic adviser

I don't expect crude oil prices to go up as fast, in the way they have come from about $50 a barrel up to the $90-95 that we see today. Prices should stabilise.

Alistair Darling

Former Chancellor

The price of crude oil and the sudden VAT increase to 20 per cent means motorists will see it at the pump as a very significant increase.

Nida Ali

Economist at Ernst & Young

We don't expect the increases we have seen recently. There was a big increase in January, but that's an unholy mix of VAT, fuel duty and crude oil.

Michael Dicks

Chief economist at Barclays Wealth

It's hard not to say that oil will pass the $100 a barrel barrier, and that is passed on to the consumer. I wouldn't be surprised if prices rose by 10 per cent.

David Kern

Chief economist at the British Chamber of Commerce

I think the price of oil will be higher than many people expect. It's going to average at just under $100 a barrel.

Interest rates Currently at record low of 0.5 per cent and is expected to rise in May

Andrew Pipe

Senior economic adviser for Lloyds Banking Group

We are assuming one rise mid-year, but the recent inflation data could prompt a slightly earlier rise, in which case we might get two increases in 2011.

Phil Thornton

Lead consultant for Clarity Economics

A hike will not counter imported food inflation, but would further undermine growth. But the bank is under pressure as it got its forecasts wrong.

Jonathan Loynes

Economist for Capital Economics

The Bank of England will concentrate on the weakness of underlying price pressures and growth in earnings to keep rates at 0.5 per cent.

Michael Taylor

Senior economist at Lombard Street Research

We expect bank rates to finish this year up 1 per cent. There are risks if the Bank acts sooner rather than later, so I expect a rate rise by May.

John Hawksworth

Chief economist at PricewaterhouseCoopers

Homeowners should assume interest rates will go back up to a base rate of 5 per cent and 7 per cent, but over three or four years.

Ian Mcafferty

CBI, Chief economic adviser

The banks can't choke off what is still a fragile and an early stage recovery. By mid-year I suspect rates having to go up very gradually.

Alistair Darling

Former Chancellor

The combination of taking £40bn from the economy, with interest rates going up, could be extremely damaging to our recovery.

Nida Ali

Economist at Ernst & Young

It's difficult for the Bank of England to balance the very high level of inflation. It should look at the two-year horizon and keep policy on hold.

Michael Dicks

Chief economist at Barclays Wealth

By early 2012 we should be back close to 2 per cent. The banks will be very concerned about their credibility in May.

David Kern

Chief economist at the British Chamber of Commerce

I think interest rates will start increasing about the middle of the year. By the end of the year I forecast the base rate at 1.25 per cent.

House prices After the worst slump since the 1990s, prices rebounded last year

Andrew Pipe

Senior economic adviser for Lloyds Banking Group

House prices will keep falling. Prices will rise slightly in the second half of the year and will end the year at 2 per cent lower.

Phil Thornton

Lead consultant for Clarity Economics

It is hard to see what will stop house prices falling further. An annual fall of 5 per cent this year might be a good outcome.

Jonathan Loynes

Economist for Capital Economics

Our forecast is for a 10 per cent fall this year and another 10 per cent next year. Prices are fundamentally overvalued and the market is unfavourable.

Michael Taylor

Senior economist at Lombard Street Research

I do see interest rates having an impact. Rates will still be very low and will go up very gradually. It may have a marginal effect on price.

John Hawksworth

Chief economist at PricewaterhouseCoopers

If you are taking out a mortgage now, be prepared to pay 5 per cent. Don't be fooled by upfront deals that are unlikely to last.

Ian Mcafferty

CBI, Chief economic adviser

I think the housing market will remain fairly weak and stagnant for 2011 and 2012 with very low levels of transactions and activity this year.

Alistair Darling

Former Chancellor

In some parts of the country they will go down because demand far exceeds supply, but there will be an upward trend in the medium and long term.

Nida Ali

Economist at Ernst & Young

We expect house prices to fall in 2011. We expect a 5 per cent fall from the recent peaks we saw last summer.

Michael Dicks

Chief economist at Barclays Wealth

There will be the odd exception in towns and regions, but the general move will be small declines of 2 to 5 per cent.

David Kern

Chief economist at the British Chamber of Commerce

House prices are pretty weak. In many measures they are actually falling. I think that if rates increase slowly it should not have much of an effect.

GDP Weak winter sales in the high street have threatened growth

Andrew Pipe

Senior economic adviser for Lloyds Banking Group

Will grow by about 1.9 per cent, a mix of weak consumer and government spending, partially offset by recovering investment and improving trade balance.

Phil Thornton

Lead consultant for Clarity Economics

Growth is likely to slow to 1.5 per cent as cuts hit activity, but emerging market growth, such as 10 per cent for China, never fails to exceed forecasts.

Jonathan Loynes

Economist for Capital Economics

A below-par recovery because of the financial squeeze and the likely weakness of household spending. Growth may only be 1.5 per cent for two years.

Michael Taylor

Senior economist at Lombard Street Research

We are looking for 2.4 per cent growth. There is an upward potential from exports and investments, even if the consumer has a tough time.

John Hawksworth

Chief economist at PricewaterhouseCoopers

The running rate of growth was about 2.7 per cent. The recovery in 2010 was speedier than expected, but we'll have to wait for Tuesday's figures.

Ian Mcafferty

CBI, Chief economic adviser

Our forecast for the year is 2 per cent which is not far from the consensus.

Alistair Darling

Former Chancellor

The economy is growing now because of what I did two years ago. The risk for Britain is that we simply bump along the water and that risk remains.

Nida Ali

Economist at Ernst & Young

Judging by the survey data from manufacturing and services, we had expected GDP to have slowed by the fourth quarter of 2010.

Michael Dicks

Chief economist at Barclays Wealth

GDP will pick up but we won't see jobs growth offsetting public-sector cuts as unemployment drifts higher. It's supposed to be coming down at this stage.

David Kern

Chief economist at the British Chamber of Commerce

It will increase on average between 1.25 and 2 per cent, probably about 1.8 per cent. It's not brilliant and shows a pedestrian growth, but it's not bad.

Consumer prices The cost of the average shopping basket has risen by 3.7 per cent

Andrew Pipe

Senior economic adviser for Lloyds Banking Group

The consumer will see 4 per cent rise on a basket of goods. Expect rising food, oil and petrol prices early in the year, fading through 2011.

Phil Thornton

Lead consultant for Clarity Economics

If it's consumer spending and retail sales, then that is likely to be weak thanks to rising imported inflation and the hit from spending and job cuts.

Jonathan Loynes

Economist for Capital Economics

Our forecast is in line with inflation. Consumer prices are a measure of inflation in the average shopping basket.

Michael Taylor

Senior economist at Lombard Street Research

Higher clothing prices are coming for the first time in a decade and food prices will partly reflect droughts in recent months. It could get quite nasty.

John Hawksworth

Chief economist at PricewaterhouseCoopers

Consumer prices are just a reflection of inflation. It's the price index and a measure of inflation.

Ian Mcafferty

CBI, Chief economic adviser

We see prices peaking close to 4 per cent around the first quarter until VAT falls from the figures in January 2012, to close to the Bank's 2 per cent target.

Alistair Darling

Former Chancellor

The VAT and fuel increases are bound to drive up prices. It's inevitable. Shops can sit on price rises, but not indefinitely.

Nida Ali

Economist at Ernst & Young

We expect consumer prices to remain high throughout 2011 and will hit the 4 per cent mark or higher, with prices falling back to target by 2012.

Michael Dicks

Chief economist at Barclays Wealth

People are getting uncomfortable. I wouldn't say the Bank of England lacks credibility, but it is uncomfortable that it is not on top of the situation.

David Kern

Chief economist at the British Chamber of Commerce

When I say inflation will reach 4 per cent or possibly more, I mean consumer prices will rise by the same amount year on year.

Budget deficit The UK's £150bn deficit is expected to fall over four years

Andrew Pipe

Senior economic adviser for Lloyds Banking Group

Growth is better than expected, but there's a still a long way to go before we are back to normal. The Government's plan is necessarily pretty tough.

Phil Thornton

Lead consultant for Clarity Economics

Expect the deficit down to £120bn, but if unemployment rises fast we face a nasty fall in receipts and a rise in social security spending.

Jonathan Loynes

Economist for Capital Economics

The deficit reduction plans overestimate the private sector weathering the fiscal squeeze and are based on unrealistically strong forecasts for growth.

Michael Taylor

Senior economist at Lombard Street Research

This year's budget deficit is going to be slightly smaller and we should see a significant improvement by the end of the year.

John Hawksworth

Chief economist at PricewaterhouseCoopers

The budget deficit is going to be about £150bn this year, which is pretty much what has been forecast. I think it will come down within four years.

Ian Mcafferty

CBI, Chief economic adviser

So far the data suggests that the targets set out in the June Budget have been achieved and there's every chance that the four-year plan will succeed.

Alistair Darling

Former Chancellor

As long as the economy keeps growing it will come down. The risk is that if the recovery is derailed it will take longer.

Nida Ali

Economist at Ernst & Young

Given the austerity measures the Government has been implementing, we expect the budget deficit to reduce throughout the year.

Michael Dicks

Chief economist at Barclays Wealth

A further unresolved issue is whether UK fiscal austerity will cause a double dip. This year may be a rougher ride than generally expected.

David Kern

Chief economist at the British Chamber of Commerce

The deficit in the UK has been too big. It has to be cut and that's happening. The measures being taken are painful, but I think they are needed.

FTSE 100 After big losses in shares, investors are buying into riskier sectors

Andrew Pipe

Senior economic adviser for Lloyds Banking Group

The market is strong despite an uncertain economic outlook. It's hard to justify that momentum continuing so expect the FTSE to start flattening off.

Phil Thornton

Lead consultant for Clarity Economics

The surge in the FTSE 100 so far this year shows that it is no longer a barometer for the health of UK plc.

Jonathan Loynes

Economist for Capital Economics

If economic growth is as weak as we expect, then earnings may disappoint the stock market. Our guess is that the FTSE 100 retreats to about 5,700.

Michael Taylor

Senior economist at Lombard Street Research

I've got FTSE index at 6700 by the end of the year. I think equities will have a good year.

John Hawksworth

Chief economist at PricewaterhouseCoopers

We don't express views on that. We leave it to the City to gamble on the stock market.

Ian Mcafferty

CBI, Chief economic adviser

In terms of the underlying climate, the economy is starting to recover. As a result, profitability in firms has been improving in the market generally.

Alistair Darling

Former Chancellor

I'm not going to start speculating, but the FTSE, by and large, mirrors people's sentiment and at the moment it's pretty mixed.

Nida Ali

Economist at Ernst & Young

In terms of shares, the market is definitely up compared with the summer. The prospects are brighter than they have been for a while.

Michael Dicks

Chief economist at Barclays Wealth

In the next five years, investors should expect stocks to deliver more, and bonds less, than they did in the last decade or so.

David Kern

Chief economist at the British Chamber of Commerce

I think that the FTSE will show a flat net position. It has been very strong, but it's going to stabilise. I don't see it falling, but I do see it flattening out.

Sterling The value of the pound has increased by 7.4 per cent against the euro since last January

Andrew Pipe

Senior economic adviser for Lloyds Banking Group

It could be very volatile given the range of possibilities in Europe. We expect a small appreciation against the euro and the dollar.

Phil Thornton

Lead consultant for Clarity Economics

Sterling's fall has been good for the UK manufacturing sector, but it has pushed up prices. A rise in exchange rates would hit exporters.

Jonathan Loynes

Economist for Capital Economics

Sterling has gained ground against the euro, but weakened against the dollar. Euro-zone tensions helped strengthen the pound.

Michael Taylor

Senior economist at Lombard Street Research

The prospect of high interest rates means sterling will probably go up against the dollar and euro. It's unlikely to damage exports.

John Hawksworth

Chief economist at PricewaterhouseCoopers

Anything that changes it will be news. By definition it's pretty much impossible to forecast in the short run. I never really trust forecasts.

Ian Mcafferty

CBI, Chief economic adviser

I can see it picking up, as it has recently against the euro and the dollar, for three to six months. Then I think it will stabilise.

Alistair Darling

Former Chancellor

If people think interest rates are going to go up, sterling will go up, which will make it much more difficult for exporters.

Nida Ali

Economist at Ernst & Young

Our forecasts say sterling is probably going to depreciate a bit in the next couple of years compared with what it has been in the past.

Michael Dicks

Chief economist at Barclays Wealth

It is doubtful that fiscal tightening will derail the recovery altogether and it's likely that sterling will end 2011 higher than it started it.

David Kern

Chief economist at the British Chamber of Commerce

Sterling is worth up to 25 per cent less than three years ago; that's good for exports. It will move within 3 to 5 per cent of where it is now.