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Archive for the ‘UK issues’ Category


It’s been an awful twelve months for the UK economy. 2010 should see some sort of economic recovery. But, few are expecting a hasty rebound. These are some of the problems facing the UK economy going into 2010.

Depth of the Recession

Normally, the UK economy expands at a regular underlying trend rate of about 2.5%. Even zero growth will lead to a growth in spare capacity and unemployment. After six successive quarters of declining GDP, the output gap is considerable. This means output is noticeably below potential, so firms will be hesitant to hire. There is a risk that the recession will lead to a lasting loss of output and jobs, and contract the UK’s productive capacity.

Unemployment

The Bank has an inflation objective of 2%, but it is unemployment which creates the greatest social / personal gloom. So far, the increase in unemployment has been comparatively hushed, at least, given the extent of the recession. However, this sluggish rise in unemployment means it will be slower to fall. After the 1992 recession, unemployment fell moderately quickly, but after this recession, the fall in unemployment is likely to be slower – more like the experience of the 1980s where unemployment remained close to three million for numerous years. In particular, it is young workers who have been hardest hit. The fear is that long-lasting youth unemployment could lead to a return to the unemployment related social conflict, distinctive of the early 1980s.

Budget Deficit

In the past few years, the UK’s public finances have taken a real mauling, leading to record peace time deficits. We relied on bubble taxes (property taxes, income tax on bonuses etc) to help stimulate inflation beating rises in government spending. However, these tax sources have dried up leading to a budget deficit approaching £200bn.

The predicament is that, although the budget deficit continues to rise en route for 100% of GDP, reducing the deficit too early could push the economy back into recession. For example, if the Conservatives were to execute their plans for expenditure cuts next year, the deflationary consequence could well thrust a fragile economy back into recession.

Problems of Prolonged Borrowing

Economic need will make it difficult to deal with the budget deficit. But, this means the budget deficit will persist to grow and this brings potential problems. If debt grows too rapidly towards 100% of GDP, it may affect the UK’s credit rating. This would make it more costly to borrow and pay the debt interest payments.

In the longer term, there is an also a fear relating to the amount of the debt and QE. Escalating the money supply raises the prospect of future inflation and a weaker sterling. At this instant, there is slight real fear of inflation and a weak pound is helping the economy to pull through. But, there is a danger that constantly high levels of borrowing could weaken the pound and generate future inflation.

Trade Deficit / Unbalanced Economy

The UK has been running a current account deficit, more or less since the recession of 1981. The economy has relied on services and the financial sector. We have struggled to remain competitive in the manufacturing / industrial sector leading to a trade deficit. Often the problems of trade deficits / decline in manufacturing are exaggerated, but the UK economy still feels uneven and this is one explanation why the UK economy was hit by the recession much further than other countries.

Propensity to Boom and Bust

The sustained shortage of supply means the UK will be susceptible to future booms and busts. It is hard to believe house prices have raised so much in the middle of a recession – a sign of the basic imbalances which exist in the housing market.

Weak Sterling

At the moment, I don’t see the weak sterling as an economic difficulty. The depreciation has helped to limit the fall in economic growth and, over time, will help to rebalance the economy and diminish trade deficit. But, if sterling continues to be pathetic over the longer term, there could be inflationary risks and a decline in living standards as imports become more costly.

Demographic Changes

An ageing population and unfunded pension deficits will make the government’s public finances more complicated in the future.

These problems could equally be applied to the US economy. I think one significant issue is to be clear on which problem is the most severe. For example, government borrowing is a distinct problem. But, although it is very serious, it is more essential to be troubled about the loss of output and unemployment foremost.

The coming months will sure shape the Economy, but who knows what they will bring? With the upcoming election a change of policy might backfire or shoot the UK back to the top.

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Darling’s Dilemma

Great Cartoon Guide from the BBC

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The Govt. posted it’s worst borrowing figures since records began in 1993 for January. The UK borrowed £4.3 billion last month to try and curb the out of control finances.

Sharp rise in spending and drop in tax receipts means Britain borrowed last month rather than repaying £2.8bn as economists expected. The effects of the recession seem to be still hitting the UK as the country were unable to post the usual surplus enjoyed in a January, a month when income tax and corporation tax revenues typically pick up.

The Office for National Statistics (ONS) said public sector net borrowing (the gap between the exchequer’s tax-take and its spending) was £4.34bn compared with a repayment of £5.27bn a year earlier. The figure was also much worse than the £2.8bn repayment forecast in a Reuters poll by City analysts, who in previous months had largely underestimated the state of the public finances.

Britain’s high deficit, lagging growth rate and high inflation have prompted many to speculate that it could be the next nation to alarm the world following Greece and Spain down the same route.  Although the treasury were quick to say that the government would meet or even beat chancellor Alistair Darling’s borrowing forecasts for the full year many are not convinced and this latest blow to the labour party could prove crucial in the next election.

This comes straight after news of the worst unemployment figure under Labour.VAT income was up 16 per cent year-on-year thanks to the rise back to 17.5 per cent on January 1. But spending hit £49.5billion for the month, with the cost of social benefits up 3 per cent to £14billion. There was some good news however as new figure revealed that car production enjoyed its biggest rise since May 1976!

Another dilemma has hit the UK economy at a very bad time when the country is trying to recover from the worst recession since the Great Crash.

How Britain's public sector net debt has spiralled in the past ten months, while debt as a proportion of GDP has soared since 2002

What are your views? Are Labour responsible or should they be given time to try soak up the problems faced by the UK?

Many Economists and analysts feel the Chancellor is underestimating the situation. What can be done to stop the ever-growing deficit? Would a Robin Hood Tax work? Surely it would be an easy way of collecting a lot of money given the amount of financial transactions taking place everyday. These figures show how much damage the recession has done and is still doing. ‘Trying to close the gap now when the economy is still so fragile would be a huge mistake and risk jobs and tax revenue in a double-dip recession’ –I couldn’t agree more.

References:

ONS,BBC,Daily Mail,Guardian

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