State of the UK Economy 2006
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Since the last recession ended in the autumn of 1992 the British economy has
experienced the longest period of uninterrupted 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 relatively 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 fueled 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 economically 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
About the Author
Richard Pettinger studied Politics and Economics at Lady Margaret Hall, Oxford University. He now works as an economics teacher in Oxford. He enjoys
writing essays on Economic and he edits an Economics Blog focused on UK and US economies: http://www.economicshelp.org/econ.html.
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Article Published/Sorted/Amended on Scopulus 2007-04-01 23:54:06 in Economic Articles
