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British Economic Outlook Bleak

British economic growth figures so far this year have been revised lower and 2011 may see a sharper slowdown due to government spending cuts, with the Bank of England also increasingly worried about high levels of inflation due to higher fuel and clothing costs.

The demand from Asian markets for fuel and other raw materials has driven the price of them far higher than expected and the western world is facing both harsh cuts coupled with higher costs. The combination could be disastrous.

The Office for National Statistics revised down third quarter growth to 0.7 percent from 0.8 percent and said growth in the first two quarters of the year was also slightly weaker than previously reported. Although they have kept growth forecast at roughly the same level there is no way of predicting how much of an effect the government cuts will have, one thing is for certain, the picture won’t be bright.

Hopes of a long-awaited rebalancing of Britain’s economy were also dashed. The revised figures showed net trade was a drag on growth in the third quarter, rather than contributing to the recovery as previously assumed.

“The raft of UK data does little to improve the prospects for the economy next year,” said Vicky Redwood from Capital Economics. “A continued strong recovery seems far from assured.”

With a VAT rise and harsh cuts coming the outlook is looking particularly bleak for the UK and the foreign excfhnage markets have responded by dropping the pound across the board. Our screens look like a sea of red numbers as the pound drops against the Dollar, Ozzy Dollar, Euro, Swiss Franc, Rand, Dirham, Yen, and all of the other 13 most actively traded currency pairs.

Minutes to the central bank’s latest policy meeting showed the Monetary Policy Committee retained its three-way split this month, but more members are becoming worried about medium-term inflation risks. This type of split and illuminates the ramshackle thinking behind the economy at the moment. If even the Bank of England can’t reach consensus then how are the financial markets going to react. At the moment it looks like they will flock to safer options, usual culprits being the Swiss franc and USD.

Inflation in Britain rose to a six-month high of 3.3 percent last month and is expected to remain well above the BoE’s 2 percent target for at least another year.

Money markets, which as recently as October were pricing in a more than 50 percent chance of another wave of quantitative easing, are warming to the view that the BoE’s next move will be to tighten policy, probably towards the end of next year.

The combination of stubborn inflation and slowing growth bodes poorly for the government which is already fighting to preserve coalition unity.