the release of stronger-than-expected US GDP data last week and favourable confidence numbers from the eurozone highlight the position of the UK as being one of the weakest economies in the G10. There is a strong chance that this week’s Bank of England Monetary Policy Committee (MPC) meeting will bring yet another dose of quantitative easing to try to to remedy this situation; a policy which has weighed on the pound since its introduction last March.
Although sterling is considered to be undervalued against the euro, the UK economy has remained in recession while the Eurozone recovery appears to have stayed on track, which suggests that euro-sterling could remain elevated for some months to come.
The substantial cost of bank bailouts following the financial crisis has clearly put the UK economy at a disadvantage to the Eurozone. But it wasn’t just the balance sheets of British banks that were exposed: those of UK consumers are in equally poor shape heading into the financial crisis and the repairing process could hinder consumption and growth for years.
Last week Eurostat reported that the household savings rate (savings as a percentage of disposable income) in the Euro Area stood at 16.5 per cent in the second quarter of 2009 – the highest rate since the series began in the first quarter of 1999.
An increase in the savings rate is natural at this point of the economic cycle and it shows that consumers are looking to protect themselves from the increased threat of unemployment and are saving more to make up for wealth lost during the financial crisis.
In the second quarter of 2009, the UK savings rate rose to its highest level for several years after hitting a low in the first quarter of 2008. That said, there are striking differences between the savings rates of the UK and the Eurozone. The second quarter high in the UK rate is a relatively moderate 5.6 per cent.
Source
Saturday, November 28, 2009
Sunday, November 15, 2009
U.K. Government Spending Must Be Cut 2% a Year, Deloitte Says
Cuts in U.K. government spending of two percent a year will be needed until at least 2014, squeezing Britain’s public services and stifling economic growth, Deloitte Economic Adviser Roger Bootle said.
The public sector will bear the brunt of additional fiscal tightening worth five percent of gross domestic product, or about 70 billion pounds ($115 billion) a year over the next five years, Bootle said in an e-mailed statement today. These cuts would be additional to measures already announced by Chancellor of the Exchequer Alistair Darling, he said.
“After a decade or more in which rapid increases in public spending have lent powerful support to the U.K. economy, the great squeeze is about to begin,” Bootle wrote.
U.K. public borrowing is forecast to rise to 15 percent of GDP this year and public debt is approaching 100 percent of GDP, leaving the public finances in “the worst shape for more than 50 years,” said Bootle, who is Managing Director of Capital Economics Limited and was a Treasury adviser under Britain’s last Conservative government, which exited power in 1997.
“Alistair Darling put some measures in place to address the situation in April’s Budget. But they did not go nearly far enough. We estimate that a further fiscal tightening worth some five percent of GDP per annum -- or around 70 billion pounds -- will be needed over the next five years, and possibly much more.”
The cuts on their own would shave more than one percent off annual real economic growth compared with recent years, Bootle said. The effect would increase to a two percent reduction when the decline in growth in household income and spending is taken into account, he said.
‘Sluggish’ Growth
“Rates of economic growth are likely to remain pretty sluggish while the squeeze takes place,” Bootle said in his note. “And if the squeeze is too tight, the economy could fall back into recession.”
Consumer-related companies and sectors will be hardest hit by the squeeze, he said, with cut backs in public investment hitting the construction and transportation industries.
“It’s not all bad news,” he said. “The widespread consensus that drastic action is needed and justified to sort out the fiscal position presents the authorities with a once-in- a-generation opportunity to remodel the U.K. economy and to reduce its dependence on the state.”
Source
The public sector will bear the brunt of additional fiscal tightening worth five percent of gross domestic product, or about 70 billion pounds ($115 billion) a year over the next five years, Bootle said in an e-mailed statement today. These cuts would be additional to measures already announced by Chancellor of the Exchequer Alistair Darling, he said.
“After a decade or more in which rapid increases in public spending have lent powerful support to the U.K. economy, the great squeeze is about to begin,” Bootle wrote.
U.K. public borrowing is forecast to rise to 15 percent of GDP this year and public debt is approaching 100 percent of GDP, leaving the public finances in “the worst shape for more than 50 years,” said Bootle, who is Managing Director of Capital Economics Limited and was a Treasury adviser under Britain’s last Conservative government, which exited power in 1997.
“Alistair Darling put some measures in place to address the situation in April’s Budget. But they did not go nearly far enough. We estimate that a further fiscal tightening worth some five percent of GDP per annum -- or around 70 billion pounds -- will be needed over the next five years, and possibly much more.”
The cuts on their own would shave more than one percent off annual real economic growth compared with recent years, Bootle said. The effect would increase to a two percent reduction when the decline in growth in household income and spending is taken into account, he said.
‘Sluggish’ Growth
“Rates of economic growth are likely to remain pretty sluggish while the squeeze takes place,” Bootle said in his note. “And if the squeeze is too tight, the economy could fall back into recession.”
Consumer-related companies and sectors will be hardest hit by the squeeze, he said, with cut backs in public investment hitting the construction and transportation industries.
“It’s not all bad news,” he said. “The widespread consensus that drastic action is needed and justified to sort out the fiscal position presents the authorities with a once-in- a-generation opportunity to remodel the U.K. economy and to reduce its dependence on the state.”
Source
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