With the confirmation that the UK has entered into a double-dip recession by recording an initial drop of 0.2% in Q1’s Gross Domestic Product (GDP), (adjusted to -0.3%) against the last quarter’s similar drop of 0.3% the question to be answered, is just how do we grow our way out of this vicious circle of decline?
Whilst the Bank of England has tried to pump-prime the economy by its massive quantitative easing programme of £350bn, with very limited success, and contemplating another round of the same to the tune of £25-£50bn, the real answer may well be to encourage big businesses to start to use the enormous cash balances that they are currently hoarding in their balance sheets.
At the moment these businesses seem paralysed with fear at depleting their cash balances in case of future funding contagion spreading from the southern European states of Portugal, Italy, Greece and Spain (PIGS).
The Item Club of KPMG, the accountancy practice, has estimated that over £754 billion in cash is being held by non-financial firms, which equates to no less than 50% of the UK’s GDP.
Their analysis was explained by their Chief Economist, Peter Spencer, who was quoted as saying:
Business investment has picked up nicely in America but British companies remain extremely risk averse. Until these companies stop stashing cash... the economy will remain on the critical list.”
Through their model, which uses the Treasury’s own model, they predicted that UK GDP growth in 2012 will only reach 0.4%, with 2013 seeing an insipid growth rate of 1.5% and 2014 rising to 2.6%.
Depressed consumer spending is one of the factors depressing growth, so maybe dynamic investment by companies, or even a resurrection of mergers and/or acquisitions may just be the answer to this.
With the current eurozone debt crisis continuing to divide political opinion between the austerity and growth camps, surely revitalising the domestic economy is a vital ingredient in ensuring the UK’s survival in these testing times.
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