Economic Review - August 2004
David Kern argues that Britain's short-term economic prospects are unusually positive, but careful strategic planning is needed to exploit opportunities and cope with risks & pitfalls.
The British economy is performing unusually well at present, both by historical standards and in relation to our main European competitors. The total economic cake (GDP) recorded strong annual growth of 3.5% in the first half of 2004, and UK employment is near an all-time high. At the same time, inflation is low (the consumer price index rose a mere 1.6% in the year to June), and although interest rates are rising, they are still at historically low levels. The world environment is also positive, with global growth at its highest since 2000. Overall, the economy offers excellent opportunities for well-managed businesses.
There are, however, potential dangers. Both globally
and in the UK , the recovery is maturing and the pace of growth
will decelerate, with GDP growth slowing from almost 3.5% this
year to some 2.5% in 2005. This is still satisfactory. But lower
growth inevitably means that the competitive environment will become
even fiercer. Moreover, interest rates will increase further. The
Bank of England's Base rate, having risen from 3.5% to 4.5% in
the final months to July, is likely to reach 5.5%-5.75% around
the middle of 2005. This is not an alarming level, but it will
make the business environment more difficult and more expensive.
Credit risks may worsen, even if there is no housing market crash.
In contrast to our own relatively strong performance this year, the Eurozone (our largest trading partner), will only grow at a weak pace, much lower in 2004 than in the US , Japan & the UK . Inadequate Eurozone growth will worsen global imbalances, exacerbate trade tensions, and increase the difficulties facing UK exporters.
The recent upturn in Eurozone inflation, in spite of ample spare capacity, is a source of concern, because it may force the European Central Bank (ECB) to raise interest rates prematurely. This will make Eurozone growth prospects even more dismal, and preclude any serious recovery. British exporters and investors would be wise to explore opportunities in America and in Asia .
In conclusion, the economic environment is positive overall. There are some serious pitfalls, but businesses with a sound strategy should be able to plan and invest for growth.