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