News Analysis: Britain to see deflation soon, but growth prospect intact

Britain might see deflation in the coming months, as the effects of lower prices of oil, food and import goods is going to be full-fledged.

But experts here believe that the possible deflation will not be able to derail British economic recovery.

INCREASED CHANCE

There is close to a one-in-two chance that Britain will experience deflation in 2015 and there remains a near one-in-three chance that this deflation will persist into 2016, according to the Warwick Business School Forecasting System (WBSFS).

The WBSFS is predicting a higher chance of deflation than a quarter ago, said the business school in a press release this week.

"These elevated risks of deflation in 2016 contrast the assessment of the Bank of England (BoE) that inflation will begin to return to its two per cent target during 2016," it noted.

Earlier this week, Mark Carney, Governor of BoE, said in the parliament that current low inflation in Britain is "temporary" and it will return to the central bank's target of two percent within two years.

Data showed that British inflation rate in January was 0.3 percent, slipping from the previous month's 0.5 percent and registering the record low.

Martin Beck, senior economic adviser to the EY ITEM Club, believes that it is a 50-50 probability that Britain will see a negative reading for consumer price index (CPI) in February.

"We expect core inflationary pressures to remain well contained, given the large degree of spare capacity in the economy. The Bank looks set to wait until early 2016 before raising interest rates," he said in a note.

Paul Hollingsworth, UK Economist at Capital Economics, said in an analysis piece that British will experience a brief period of deflation around March or April this year, as the country has "almost certainly not seen the full effect trickle down to other goods" besides the energy price drop.

THREE PERCENT GROWTH

The Warwick Business School also noted that the low inflation is not expected to slow GDP growth in the country.

The British business school predicts that the UK economy is likely to grow around three per cent per annum in both 2015 and 2016.

Ana Galvao, professor at the business school, said: "High expectations of deflation are not expected to slow GDP growth in the UK. In this sense, we are predicting that any deflation that the UK might experience will be 'good' rather than 'bad'."

Beck said that the low inflation or even the deflation environment is "good news" for the British consumer and the recent strong figures for the retail sector demonstrate that the lower price is providing the economy with renewed momentum.

Hollingsworth also reckons that with British households' and firms' expectation for the inflation in the medium term remaining fairly well anchored, there are "few signs" that low inflation is becoming at risk of becoming entrenched.

Data from the Office for National Statistics (ONS) showed that Britain's GDP increased by 0.5 percent between the third quarter of 2014 and the fourth quarter of 2014, unrevised from the previous estimate. For the whole year, British GDP was estimated to have increased by 2.6 percent, compared with 2013.

The secretary general of the Organization for Economic Cooperation and Development (OECD) Angel Gurria Tuesday said that growth in the British economy was the fastest among G7 nations in 2014. Endit