Wednesday, March 23, 2011

Difficulties Facing the UK Economy

The Office of National Statistics is launching an interactive discussion for people to suggest factors which should contribute to a new index of national well-being. Economists have long suggested that real incomes (real GDP) offer a limited guide to living standards and quality of life. Therefore the index of well-being could include a wider variety of measures than just GDP. (Measuring Well-Being)

It would perhaps be fortunate timing, if a new index took people's attention away from traditional economic variables. Unfortunately, going into today's budget it's hard to find an economic variable that gives any sense of well-being.
  • Economic Growth (contraction in Q4 of -0.6% 2010) Still recovering from largest decline in GDP since the 1930s (GDP at ONS)
  • Inflation (CPI 4.4%, RPI 5.5% - highest level since 1991) ONS inflation seems the MPC are persistently surprised by the rise in UK inflation.
  • Unemployment 8%,with economic activity at only 70%
  • real wages declining (UK Real wages)
  • Real savings falling as inflation outstrips interest rates
  • Government borrowing (at record levels in peace time) (Government borrowing)
  • Consumer confidence. (index fell to -29 in Feb). It was the biggest plunge in confidence since the height of the 1992 recession. (Consumer confidence collapses)
  • Housing market still faces many challenges such as weak bank lending and a stagnant market.
Perhaps the secret is to ignore these traditional variables and create a much wider index of living standards. It could include:
  • Levels in higher education (don't mention the funding cuts and tuition fees.)
  • Time spent in traffic jams (at least the record price of oil is discouraging some motorists from travelling)
  • The cleanliness and beauty of living environment
  • The number of people involved in cultural activities (like Britain's got talent)...
  • The success of Britain's sporting teams (we did retain the Ashes this year)
On second thoughts, maybe we should stick to traditional variables and hope things get better.

My main feeling is that the coalition government were too enthusiastic in talking down the economy and imposing spending cuts at a time when the economy can't easily absorb them. It is easy to talk about austerity, but much more difficult to encourage people to be optimistic. Hopefully this week's budget will offer some positive moves to restore a sense of balance to the economy.


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