Thursday, April 8, 2010

Economic Recovery in UK

By nature I'm an optimist, I'm always looking for the light at the end of the tunnel and suspicious of the tendency to magnify the doom and gloom which surrounds the economy. (economics of fear)
However, even the bravest optimist would have to admit defeat at the tide of bad news that has surrounded the economy in the past two years.

Yet, it might be that after the unprecedented stimulus to the economy, (months of 0.5% interest rates, quantitative easing, biggest peacetime fiscal deficit) the economy is finally beginning to return to strong growth. A recent report by the OECD suggests the UK could have the second highest growth rate in the OECD at 3.1% in 2010.

This would be very beneficial for the economy in many respects. The chancellor's recent forecast for deficit reduction was based on such an optimistic growth forecast. A few months ago this kind of growth forecast appeared to be more wishful thinking rather than based on reality. If the UK does grow this strongly, it will take some pressure off the bond market. Markets would have greater faith in our ability to pay off the record debts. The UK could well hang on to our valued AAA rating and it could give any government greater time to deal with the scale of the fiscal deficit.

Of course, one year of 3% growth is still going to leave a structural deficit of very significant proportions. And whilst growth of 3% would help to reduce unemployment, there is still a long way to go before the level of spare capacity is overcome.

The economy is still threatened by prospect of tax rises, spending cuts, oil price increases, recession in Eurozone. But, the job of any chancellor would be an awful lot more difficult if we had a growth forecast of 0%. Spare a thought for Greece, stuck in recession and facing a sell off in bonds despite an attempt to tackle the budget deficit.

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