However, is their cheerful optimism matched by economic reality?
Reasons to Be Optimistic about UK Economy
- Economic Growth: Current Economic growth for 2007 is forecast to be 3.1%. This may be revised slightly downwards, but, it does make the UK one of the fastest growing OECD countries.
- Inflation: CPI inflation is on target. It is currently very close to the government's target of 2%. It is just under at 1.9%
- Economic Cycle: The end of the Economic Cycle? The UK economy has been experiencing its longest uninterrupted economic expansion on record. Since the end of the last recession in 1992, economic growth has been positive. There is even evidence the Long run trend rate of growth (basically the average growth) has slightly increased. With an independent monetary policy the UK seems to have brought an end to the boom and bust economic cycle which destabilised the economy so much in the post war period.
Why Prospects may be Worse than Government Predict
Many experts predict that the government's growth forecasts are over-optimistic. The government itself has reduced growth forecasts to 2.25% for 2007. However, they predict growth will spring back to 3% in 2009 and 2010. Economists argue the government has failed to take into account potential adverse effects on the economy
Potential Problems for UK economy
- House Price Collapse. - If not a collapse, house price growth could fall significantly, this would take a lot of the energy out of consumer spending. - Are House prices set to fall?
- Global credit Crunch - The impact of the US mortgage crisis has yet to be fully felt in the UK, despite the recent Northern Rock crisis.
- Recession Possible: It is unlikely we have seen the end of the economic cycle. There is a good chance we will see a much more marked slowdown in growth than the government predict.
- Current Account Deficit. At the moment the current account deficit is 3% of GDP. This is not as serious as the US deficit (at around 6%) but, in the long term it may require a readjustment and lower consumer spending to reduce the deficit.
- Government Borrowing. Despite being at the peak of the economic cycle, government borrowing is already close to breaching the 3% ceiling (imposed by the government themselves.) Any slowdown in growth next year will cause tax revenues to be less than predicted. Therefore, the chancellor may find himself in the unwelcome position of having to increase taxes or limit public sector spending. Something he would hardly like to do before an election. (the government may yet regret not having an election this autumn.
- High Level of Debt. The UK savings ratio is at an all time low. The level of consumer debt is very high (partly caused by rising house prices) This level of debt makes the economy more vulnerable to any interest rate changes. It may mean that consumer spending could fall, when confidence reduces. - Record debt levels threaten UK economy
- RPI inflation is 4.1% For those who feel inflation is under control, it is easy to forget that the old measure of inflation, RPI is actually above the government's target. Arguably this gives a more convincing account of inflation because it includes more items than the new CPI measure. Therefore, the persistence of underlying inflation means that the scope for interest rate cuts is much less than many hope for.
The UK economy is doing well. However, the budget deficit will be an increasing problem because I feel that the government is being overoptimistic in projected tax revenues. At the moment the chance of a recession is pretty remote, but, with a global slowdown and a decline in house price growth. It is is quite likely growth could be much lower than forecast in 2008 and 2009
Prospects for UK Economy
- The Economy: In this uncertainty a recession is a possibility - at Independent