UK economy expected to get even worse-before it gets better

If you thought that things in the UK couldn’t get any worse, then it would appear that you might be wrong. At least so the experts say. However it would appear that we won’t need to be taking our medicine for too much long with the consensus of opinion amongst the financial community is that at by the end of 2009 things will begin to look a little more optimistic, and 2010 might even see some growth. This recovery, if it does arrive as predicted, will come a lot earlier than these gurus were forecasting not so long ago. The likely reason will be the many measures taken and yet to be implemented to stimulate the UK economy. Measures that include the Bank of England’s drive to inject billions of pounds into the economy, that has reached full force in recent months. .

Against the backdrop of this mood of cautious optimism that Brown and Darling’s plan might even work there are still some major UK economists who will hasten to point out that the economy is now likely to shrink by three percent in 2009 this year. In February the annual projection figure was 2.9 percent, so while the downgrade estimate is far from encouraging. The same economic correspondents are conservatively suggesting a growth of 0.5% percent in 2010. Hardly boom times but at least encouraging and something to look forward to in the UK , where things are as tough as they have been for many years.

The economy contracted 1.5 percent in the last quarter of 2008, the deepest contraction since 1980, confirming the first recession in the UK since the 1990s.

Recent data suggest the economy is in deep trouble. Industrial output shrank at its fastest pace since 1981 in January, despite a 20 percent fall in sterling in the last three months which should benefit exports, while the trade deficit widened.

The economy’s performance contrasts with 3.0 percent growth in 2007 and 0.7 percent last year, but forecasts were relatively wide, ranging between a 1.3 percent and 4.1 percent contraction this year.

British investors face a 20 billion pound dividend shortfall this year as UK companies opt to protect their balance sheets in the global recession.

The slide in earnings caused by crumbling demand is forcing a hard rethink about how much to pay UK shareholders, who traditionally have attached high importance to dividends.

Morgan Stanley expects a 60 percent peak-to-trough fall in UK profits, worse than the early 1930s at the time of the Great Depression.

Analysts say this will intensify downward pressure on yields.

“Dividend distributions are falling. Headline dividend yields are not to be trusted. We think there is more dividend downside ahead,” Citigroup said in a note to clients.

The ratio of dividend yields to government bond yields has averaged 1:2 over the last few decades, and analysts have seen a ratio of even 1:1 as a buy signal for equities.

But though one year forward UK dividend yields at 6.4 percent are more than double government bond yields at 3.11 percent, few investors see this as a call to buy stock, partly because many question the accuracy of dividend forecasts in an uncertain environment.

A raft of economic and corporate news showing the severity of the global crisis also offered glimmers of stabilizing, and investors seized upon the silver lining on Thursday.

Bank of America reported a return to profit, General Electric was unruffled by a ratings downgrade, U.S. retail sales surprised with only a slight dip and China reported a surge in lending in the face of its economic slowdown.

Stock investors responded by driving the blue-chip Dow Jones industrials index .DJI 3.5 percent higher. The broader S&P 500 index .SPX rose 4.1 percent. .N Earlier, the pan-European FTSEurofirst 300 .FTEU3 index of top European shares turned positive, gaining 0.6 percent.

Bank of America (BAC.N) provided the week’s latest reassurance from the fragile U.S. banking sector, recipient of massive government bailouts. The largest U.S. bank said it was profitable in January and February.

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Tags: Bank, British Economy, Budget, Recession, Stock Markets, Stocks and shares, UK Recession