Tuesday, January 4, 2011

Outlook for UK Economy

I posted a brief overview of the key elements of the UK economy in 2011 at my other blog.

It doesn't make great reading, though it could have been much worse given the depth of the recession. We still live in unusual times. Base rates (0.5%) are less than CPI inflation (3.3%). This gives a negative real interest rate. If there is a feeling that the economy has returned to normalcy then we could see Bank of England base rates increase to 5% fairly quickly. This negative interest rate is one of the paradoxes that characterise the UK economy

The big issue for the economy in 2011 is the extent to which austerity measures derail the economy. Talk of spending cuts seems to be on everyone lips. At Christmas time, it was hard to speak to people who didn't seem affected in some ways. Today, the increase in VAT will hit everyone. Given this climate of austerity, stagnation in house prices (or worse) it is hard to see a runaway economy. The problem is that if we see slow growth, it may be insufficient to reduce unemployment.

On the positive side, there are signs of economic expansion. The devaluation in sterling has finally helped to boost exports and the manufacturing sector. However, given the grim situation in European countries like Ireland relying on a small exporting sector may be insufficient to maintain strong growth.

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