What news over the Summer for the UK;- Bank of England interest rates – no change, economic growth forecasts – no change and the football World Cup – a DISaster.
The coalition government has been away on holiday so no progress on getting the country back on track, and Labour meanwhile is trying to elect a new leader. Will the austerity measures actually bring about real cuts in the UK deficit or is it just a Lib / CON?
The Autumn has arrived and with it the reality of a long drawn out recovery, but not in house prices from latest comments. Travel disruption in the UK, public sector cut backs and general strikes in Europe could stifle any chance of a TENTative improvement in Euro growth estimates.
This week leaders of some of Britain’s biggest businesses gave an emphatic endorsement of the coalition Government’s decision to cut spending immediately in order to pay down the UK deficit.
That of course is the private sector view, however the suggested 25% cuts in the public sector have not engendered the same reaction from those employed in this area or their unions, with a figure mooted of around 600k jobs to be lost in the next few years. The Government expects new jobs to be created in the private sector to cover most of these losses, but there are two factors that show this may not happen and thus push the UK into perhaps a “double dip” recession. Firstly, the public sector relies on supplies from the private sector and so there are bound to be ancillary job losses there. Secondly, many companies have already saved job losses by putting in pay freezes and short-time / part-time working. Any recovery will only mean putting the effected employees back to work full-time and thus not produce additional employment.
There are difficult times ahead but now that the budget has at least provided the benchmark on what to expect – businesses now can plan with some certainty their future recovery strategy.
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There has been a raft of statistics in the last couple of weeks which seem to tell the same story as a few months ago – base interest rates on hold at 0.5%, GDP growth negligible, inflation slightly decreasing but still around 3.5%, UK debt borrowing figures revised downwards but on such high figures the repayment issues remain critical, sterling falling against the US Dollar and marking time with the Euro.
Global stock markets however have been falling from their highs early in the year, then rallying and retreating week to week, reacting to the various pronouncements on Greek debt repayments, the situation in Spain, Portugal, Ireland and Italy and other significant events such as the BP oil spillage in the Gulf of Mexico.
What is of more concern to the UK Treasury is the Fitch credit rating agency report which makes the case “for an acceleration of deficit reduction, particularly in light of events in the euro-area sovereign debt market in recent months.” Fitch also noted that the new coalition government had acted “very quickly”, making deficit reduction a top priority, but sounded a note of caution. It pointed out that most other countries had pledged to cut their fiscal deficits by more than the UK “with other European sovereigns strengthening their fiscal consolidation plans and market concerns about sovereign risk in advanced countries increasing, both the size of the UK deficit currently projected for 2011 and the failure to reduce it to 3% of GDP within five years are striking.” The UK currently has an AAA rating however this is being tested as each month passes as credit ratings are important as they influence how much it costs governments to borrow on open markets. If the UK does not meet or exceed its debt reduction targets, the rating will be cut and a deeper second dip recession may result……………..
For those with mortgages or loans last weeks decision by the Bank of England to keep the UK base rate at 0.5% is good news, but for net savers it is now a year of exceptionally low returns with inflation more than cancelling out any interest earned. Indeed, it is also lucky that UK Plc’s debt mountain is only attracting low levels of interest, as the Bank for International Settlements, (BIS), has stated “Interest payments on the UK’s public debt will double from 5% of GDP, (Gross Domestic Product), to 10% within a decade under the bank’s “baseline scenario” before spiraling upwards to 27% by 2040 – by far the highest among the OECD club of developed countries.” With the political parties currently parading their manifestos, none have managed to look beyond the next five years, (the next term of government), but the austerity measures we all will face indicate that their policies will only half the current deficit at best if all the public spending cuts, tax increases and efficiency initiatives deliver. The recession is over………………..?