The British economy is at a crossroads. Although no longer in recession, the UK is demonstrating growth at levels best described as anaemic – and the sustainability of that growth is in question.
Analysts are sharply divided in their predictions. While some believe that the economy has turned a corner, others continue to predict a double-dip. So what do the experts think, and what does this mean for your business?
Plenty of people are broadly optimistic about the UK’s economic prospects. Let’s not forget that the most recent GDP figures, published last week, show that the economy is still growing. GDP rose by 0.8 per cent during October, beating most analysts’ expectations.
In a separate survey, the Chartered Institute of Purchasing and Supply (CIPS) said that manufacturing was also performing well. The CIPS activity index suggested that growth in the crucial sector had increased for the first time since March.
Indeed, some of the figures released in the last couple of weeks have been so positive that analysts have reversed their expectations regarding quantitative easing (QE). IHS Global Insight economist Howard Archer last week cited the “resilience of GDP growth” as evidence that the Bank of England would put the scheme “on the back burner” at their next meeting. As it happened, this prediction came true; just today, the Bank of England announced that no new money would be made available under the QE scheme.
This slew of positive data has not gone unnoticed in the credit markets. Rating agency Standard & Poor revised its views on the UK economy, upgrading its outlook to ‘stable’ from its previous ‘negative’.
Of course, many commentators are less enthralled by the putative recovery. House prices seem to be a cause for particular concern.
According to Nationwide, average house prices fell by 0.7 per cent in October. Net mortgage lending is also falling significantly and, as a result, transaction levels remain depressed. Just 47,500 mortgages were approved in September, and the number was even lower last month.
The housing market is often seen as an indicator of the imminent health of the economy at large. House prices entered recession before the rest of the economy, and it now seems pretty clear that housing market has entered a double-dip.
In the medium term, interest rates also present a potential problem. The hyper-inflation predicted by critics of quantitative easing has yet to materialise, but across the board analysts remain concerned about rising rates.
The Bank of England’s rate-setting Monetary Policy Committee (MPC) has so far resisted calls to begin hiking the base rate. But these calls will only get louder as inflation becomes more problematic. Andrew Lilico, an economist at the Policy Exchange think tank, said in August that rates could rise as high as 8 per cent by 2012. This would have a disastrous impact on the affordability of credit, and could seriously threaten many households’ ability to pay their mortgages.
Last month’s Comprehensive Spending Review also caused ripples of concern, and it could be this announcement that yet proves to have the most dramatic impact on the economy. Despite a raft of new measures intended to boost small business growth, the looming public sector cuts are likely to cause widespread job losses. If half a million public sector workers find themselves without employment, consumer demand will inevitably suffer.
…and the future
Interest rates are likely to be at the forefront of every borrower’s mind. Rates will go up – of this there is no question. This is likely to cause problems for businesses on a number of fronts. Primarily, the cost of their borrowing will increase. Secondly, and just as importantly, the cost of consumer borrowing will also rise – and this will have a knock-on effect on the amount they spend at the tills.
Luckily, many businesses and individuals have chosen to pay down their debts more quickly while interest rates have been low. This will hopefully minimise the impact of rate rises. It is worth noting, however, that rifts are beginning to emerge within the MPC. While most members have rejected the idea of immediate rate rises, others are concerned that putting off the increase will result in a bigger shock later.
The government’s spending cuts are also a cause for concern for many businesses. It seems inevitable that a number of important business services will be cut; BusinessLink is one of the highest-profile casualties so far, but there will surely be more. Widespread redundancies may also hit consumer confidence, and retail businesses in particular will have to be prepared for this.
Opinion is split on the trajectory of the economy. In the short-term at least, the best a business can do is to keep a close eye on its cashflow and continue to look for new ways to safeguard and expand its customer base.
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