State of the UK Economy 2006
Since the last recession ended in the autumn of 1992 the British
economy has experienced the longest period of uninterupted
economic growth since records began. After strong growth of 3.2%
in 2004, in 2005 economic growth was lower than predicted at
only 1.6%, however growth is expected to pick up to 1.8% in 2006
and 2.4% in 2007. Source (National Office of Statistics)
The significant feature of UK economic growth is that we appear
to have avoided the boom and bust economic cycles which
characterised the post war period. Since 1992 economic growth
has usually been realtively close to the long run trend rate of
2.5%. This increased stability should help long term investment
decisions.
However one drawback to the economic growth is that many
economists argue that it is unbalanced. The manufacturing sector
has continued to under perform with the main impetus for growth
often coming from consumer spending. For example in the late
1990s the sharp rise in the housing market fuelled consumer
spending. Also with interest rates at 4.5% (in 1991 they reached
15%) consumers have been encouraged to borrow even more. This
has led to a fall in the savings ratio to a record low of 4.0%
in 2000 (compared to 12% in 1980). Since 2000 the savings ratio
has recovered a little to 4.7% but it still remains very low
with record levels of spending on credit cards. This means the
UK economy would be very sensitive to any rise in interest rates
which may occur in the coming 24 months.
Unemployment
Unemployment has fallen significantly since 1992 where the
claimant count reached over 3 million unemployed. However after
reaching an all time low in 2004 unemployment is now starting to
gradually increase. The Office for National Statistics (ONS)
said that the number of people out of work rose by 72,000 to
1.49 million or 4.7% in the three months to October. Using the
governments less reliable measure of unemployment (those
claiming benefits - JSA) unemployment stands at 902,000 in
November, the tenth month in a row that it has risen. More
worryingly is the fact that the number of economicaly inactive
people has risen to an all time high. This puts pressure on
government finances (Pay more benefits and receive less tax).
The future prospects for unemployment remain uncertain. If
growth continues to be below trend further job may be lost,
particularly in the beleagued manufacturing sector. However if
growth does pick up this upward trend may come to an end. Also
many economists argue that the natural rate of unemployment in
the UK has fallen due to increased labour market flexibility and
successful supply side policies of the 1980s and 1990s. The
unemployment rate in the UK still compares favourably to EU
economies like Germany and France where unemployment is close to
double figures.
Inflation
Inflation in the UK continues to be close to the governments
target, despite the continued high prices of oil. In December
the CPI fell to 2.% down from over 3% at the end of 2004. This
could lead to the prospect of future interest rate cuts,
although the MPC disappointed business at the last meeting of
the MPC by keeping interest rates at 4.5%. With regard to
prospects for next year some analysts fear that if there was a
significant fall in the supply of oil from Iran (due to
political reasons) the price of oil may continue to rise to $100
a barrel. At these levels it is quite likely that it would then
feed through into cost push inflation. However at the moment
such forecasts remain conjecture. Also there remain many
powerful downward pressures on inflation such as price
competitiveness of China, weak wage growth in the labour market
and a moderation in the housing market.
Government finances
Despite 15 years of economic growth the government has been
forced to borrow more than anticipated. The Pre-Budget Report
forecast for 2005/6 is net borrowing of £37.0 billion. (The
deficit on current budget showed a deficit of £4.0 billion, for
December 2005 ) This indicates the government is close to
breaking its golden rule for borrowing and the chancellor may be
forced to raise taxes or cut spending if the finances don't
improve. As a % of GDP public sector debt has risen from 30% in
2001 to 37% in 2005. However this is significantly lower than
other OECD countries such as
Germany: 4.2% of GDP France: 4.2% of GDP USA: 4.9% of GDP Japan:
7.4% of GDP (2003 financial years )
http://www.statistics.gov.uk/cci/nugget.asp?id=206
Current account deficit
Current account deficit widen in the last quarter of 2005 to
3.5% of GDP, partly due to insurance payments resulting from
Hurricane Katrina. This is the largest deficit for a long time.
In the long term a rising deficit could cause constraints on
lower interest rates and growth, although like the US the UK has
been able to shrug off current account deficits without many ill
effects
Conclusion
Despite moderate rises in the unemployment rates the general
prospects for the UK economy remain positive. With a backdrop of
low inflation and steady economic growth it is quite likely
economic growth will pick up creating more jobs by 2007. If
inflation continues to be close to the governments target it is
also quite likely interest rates will be able to come down a
fraction. The main cause for concern with the UK economy is the
relative weakness of the manufacturing sector and industry in
general. This makes it difficult to reduce the current account
deficit and may cause more job losses in certain sectors of the
economy.
- R.Pettinger 13/02/06
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