Entries Tagged 'uk economy' ↓

 Another Case: How Does Japanese Investment effect the UK economy?

• If a Japanese firm (e.g. Nissan) built a factory in the UK. This would be a surplus on the financial account. It counts as long term capital investment
• If the Japanese firm then sold the goods (Nissan cars) from the UK to Europe. This would be a credit(surplus on the UK current account)
• If profits from this Japanese firm were sent back from the UK to Japan,  this would count as a debit (deficit) on the current account.
• A deficit on the current account needs financing by a surplus on the financial account (used to be capital account). Therefore, this long term investment helps finance the UK current account deficit.

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In many ways the economy is in a good position. The main economic indicators suggest a strong and sustainable economy, which offer good prospects for 2008.

• Economic growth, at 2.6% is close to the long run trend rate.
• Unemployment, according to JSA measure, is under 1 million. At 3% of the labour force this is fairly close to full employment. (although the more reliable Labour force survey suggests the true level of unemployment is higher.
• CPI Inflation is 2.1%. This is almost exactly the government’s target of 2% +/-1

The main economic predictions forecast similar statistics for 2008. Economic growth is forecast to continue at around 2.5%. In the latest Bank of England inflation forecast, they predict inflation will rise slightly before dropping back to 2% at the end of 2009.

All these statistics and forecasts suggest that the government is correct to claim that the UK economy is in a very strong position for 2008.

However, there are several trends which suggest that this optimism may be misplaced.

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Yesterday, the Bank of England kept interest rates constant at 5.75% for the fourth consecutive month. However, it looks increasingly likely that the base rate will fall in 2008, possibly to 5%.

Every three months the Bank publish an inflation report, which is a forecast for inflation over the next couple of years.

Despite recent factors causing cost push inflation (oil prices, fuel prices) the outlook for inflation is forecast to be benign. The Bank predict that CPI inflation will be close to the government’s target of 2% by 2009.

Other economic indicators also pointed to a slowdown in the growth of the economy. With slower growth, inflationary pressures will recede and this will enable cuts in interest rates. Evidence of a slowdown comes from:

• Credit Crunch. – Due to shortage of global credit, banks are becoming more reluctant to lend mortgages. However, they are now being more strict in lending credit, even for small purchases. This article at Independent show some examples.
• Borrowing costs increase – despite base rates staying the same. Due to shortgage of credit, banks have increased their standard variable rates. This reflects the increased difficulty of attracting funds.
• surprise fall in retail sales in October
• Falling House Prices. The Halifax have reported lower house prices.
• Predictions of Share price falls (by Mervyn King)
• Slowdown in US economy spreading to rest of economy
• Strong Pound making exports less competitive.

In the 1980s, The UK introduced many supply side policies such as privatisation, deregulation, and reform of trades unions. The government also cut the higher rate of income tax from 80% to 40%. It was hoped that these supply side policies would create a productivity boom. The government argued this reinvigoration of the British economy would enable a faster rate of economic growth, and overcome the years of under achievement.

The Lawson Boom – The Miracle that never was

In the late 80s, economic growth reached 5% and the Thatcher government started to believe that it had succeeded. It was the era of the Lawson boom; confidence was high, house prices rising and a new feeling of wealth was almost visible (especially in the south) Newspapers and not just the government started to talk of an economic miracle. However, the ‘economic miracle’ was short lived the fast pace of growth caused the economy to overheat. As a consequence, inflation rose to 11% and the government were forced to raise interest rates in an attempt to reduce inflation. The Lawson boom was soon over and the UK was left with a pretty bad hangover: growth fell in 1992, unemployment rose to 3 million, and house prices plummeted by 15%.

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