World Economy
0

Increasing Concerns About UK Economy

The lackluster growth figures released at the end of July 2017 confirmed the relative slowdown of the economy in the first half of 2017: all of a sudden Britain has become the slowest growing of the major western economies
The squeeze on real incomes from higher inflation must be expected to rein in consumers’ expenditure.The squeeze on real incomes from higher inflation must be expected to rein in consumers’ expenditure.

All of a sudden Britain has become the slowest growing of the major western economies, and there are increasing concerns about its medium-term outlook. Iain Begg, professorial research fellow at the European Institute, London School of Economics and Political Science, writes that with both government and opposition fixated on what kind of Brexit to favor, there is a growing risk that fundamental and necessary measures to underpin the economy will be neglected.

Until well after the turn of the year, the UK economy seemed to have shrugged off any immediate economic effects of the EU referendum. GDP growth had remained steady at an annual rate of around 2%, enabling ministers to claim the UK was the fastest growing of the major western economies; the total number of people in employment continued to rise; significant foreign investors (such as Nissan) had announced plans for new projects. LSE reported.

More recently, however, sentiment has turned, and there are increasing concerns about the medium-term outlook for the economy. Political uncertainty is, unsurprisingly, one reason and was central to the downbeat assessment from Mark Carney, governor of the Bank of England, in his press conference after the August 2017 meeting of the Monetary Policy Committee.

Although the economy had already decelerated in the first quarter of 2017, (Prime Minister) Theresa May’s failed gamble on a snap general election manifestly has had a disruptive and damaging effect. The lackluster growth figures released at the end of July 2017 confirmed the relative slowdown of the economy in the first half of 2017: all of a sudden Britain has become the slowest growing of the major western economies.

Political Confusion

 

What had appeared–irrespective of whether it is considered the right approach to Brexit–to be a clear negotiating position has given way to ambiguity about what the UK wants. Both main political parties have confused positions, with leading figures issuing contradictory messages about whether they want the UK to stay inside the single market or the customs union, or what will be done to restrict EU migrants.

Headlines about looming shortages of National Health Service staff vie with good news stories about BMW committing to Britain for the production of its new electric Mini. Speculation abounds about whether the prime minister can struggle on in office, perhaps until the Article 50 process ends in spring 2019, or will be defenestrated as soon as the Tory party settles on a viable successor, possibly within weeks.

Short-Term Prospects Mixed

On the one hand, job creation remains robust, notwithstanding some worries about the quality of jobs and stagnating wages, and employment is at an all-time record level, inflation is low, and the economy is still attractive to foreign investors. The gradual improvement in the fortunes of the eurozone, the UK’s most important external market, should help to sustain external demand.

On the other, the squeeze on real incomes from higher inflation must be expected to rein in consumers’ expenditure, and some of the imbalances in the economy still weigh on the economy. These include the high level of consumer debt, a historically low savings rate, the precarious public finances and the deficit on the current account of the balance of payments. Thus:

Data from the ONS for the first quarter of 2017 show the external position, which had been improving in the course of 2016 is again deteriorating, with the current account deficit rising to 3.4 % of GDP. The main explanation is the poor record of exports of goods. Moreover, the UK has been in persistent external deficit over several years, averaging more than 4% of GDP over the last five years.

Continuing expansion of consumer borrowing, up 10% in the last year at a time when incomes have grown by only 1.5%, prompted a warning on credit on July 24th from Alex Brazier, the Bank of England’s Executive Director for financial stability: it is a growing source of vulnerability.

At the end of July 2017, the chancellor of the exchequer, Philip Hammond, announced a further postponement (until 2027–the span of two full parliaments) of the target date for eliminating the deficit in the public finances.

 

Add new comment

Read our comment policy before posting your viewpoints

Financialtribune.com