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