Wednesday, December 14, 2011

Outlook for UK Economy 2012

The Bank of England have done a good job in avoiding the temptation to tighten monetary policy, despite having to tolerate headline inflation rate of over 5%. Underlying core inflation has always been on target. There is no sign of wage inflation like in the 1970s or 1980s. To have tightened monetary policy in 2011, would have only made the recession deeper. In 2012, inflation is likely to fall considerably.

Inflation



After peaking at over 5% in 2011, UK inflation is set to drop sharply in 2012. This is because the inflation of 2011 was due to temporary cost push factors. By mid 2012, these will have vanished from the 12 month index. The temporary inflation has not changed inflation expectations, and it certainly hasn't caused wage inflation.

As a result, interest rates are likely to be held at 0.5% throughout 2012, unless there is an unexpectedly strong recovery

Economic Growth


Despite £275bn of quantitative easing, some forecasters, such as the OECD, predict the UK will slip back into recession in 2012. This prediction of recession in 2012 shows the limitation of quantitative easing and the limitation of monetary policy. (see: problems of quantitative easing) Despite the efforts of the Bank of England to keep interest rates low and create extra money, this has only had a limited impact on economy. There have been much greater deflationary pressures in the UK. These include:
  • Government spending cuts
  • Rise in unemployment to over 2.64 million.
  • Squeeze in living standards from falling real wages
  • Recession and uncertainty in Europe

Official groups like the Bank of England and OBR still predict the UK will avoid negative growth, but even most optimistic growth forecasts stick to growth of less than 1%. This will be insufficient to reduce unemployment. It will feel like a recession.

UK House Prices


ukhouseprices

UK house prices are likely to remain stagnant. Only the limited supply and low interest rates are preventing sharp falls in house prices to reflect the absence of demand (especially from first time buyers who are being squeezed out of market).

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