State of UK economy 2007
2007-01-24 07:50 AM | Posted by Tejvan Pettinger | Permanent Link | economics
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Despite the recent surprise in inflation reaching an 11 year high of 3% and interest rates rising again it is worth bearing in mind that the general state of the UK economy is remarkably good. This good overview of the UK economy is generally backed up by a report from a report by Ernst and Young recently published. These are several reasons to be bullish about the state of the UK economy.
- Strong and continued economic growth. Economic growth is currently 3% and is forecast to be 3% throughout the year into 2008 Economic growth has been positive since the middle of 1992 making one of the longest periods of continuous economic growth on record. It appears that the UK is no longer subject to economic cycles. It is worth remembering in the 1970s and 1980s the economy was particularly volatile with two very deep recessions of 1981 and 1991.
- Unemployment has fallen considerably since 1992. The governments official method of counting unemployment is close to 3%, although the ILO figure is slightly higher. Many firms are reporting difficulty in filling vacancies. The mass unemployment of the early 80s and 90s appears to be a thing of the past.
- Resilient housing market. Ignoring the worst predicitions of the housing market pessimists the UK housing market continues to be buoyant with rising house prices being a strong factor in maintaining consumer spending and confidence. There is increasing evidence a large proportion of these house price rises are sustainanle.
- Interest rates are close to peaking. Although interest rates have risen 3 times in the past several months there is little likelihood of future interest rates rising over 5.5%. Back in the 1980s interest rates would often rise by 0.5% or even 1% at a time.
- Inflation has been within the governments target for several years. Although the CPI edged up to 3% it is expected the rate will fall as energy price rises are no longer counted. It appears the preemptive monetary policy of the MPC is working and has provided a strong counter inflation perspective in the UK economy. This has helped to reduce inflation expectations and keep inflation low.
- Rising company profitability. With rising asset prices, a strong economy company’s have witnessed rises in the levels of their profitability. This has led to increased investment which bodes well for the future of the economy.
- Increased availability of a range of mortgages. The stability of the economy has encouraged financial institutions to lend increasingly bigger amounts of money. There is an increased range of mortgages on offer enabling people to buy houses, despite the rise in prices. The % of homeowners continues to rise.
Weaknesses in the UK economy
- Export sector has struggled to maintain its share of the market. Manufacturing has often been the weakest part of the UK economy, this has continued recently. They haven’t been helped by rising interest rates and a strong pound. This has increased the current account deficit, although it is disputed how serious this problem is.
- Increased borrowing by the government. Despite continued growth in the economy the governments increased spending has led to increased government borrowing and higher interest payments. For the first time national debt increased to over £500 bn. As a % of GDP this is still low compared to other EU countries.
- Are house prices overvalued? With a lot of consumer spending driven by rising house prices a fall in UK house prices would have a significant negative effect on the UK economy.
UK economy at BBC
