The UK series: Present Issues 2/6

September 18, 2013

To the envy of other economies, the UK has recently produced a collection of impressive results. Unfortunately, this makes it very easy to forget how precarious their economic revival has been. The UK faced a prolonged period of stagnation, where unemployment surged above 8.4%, and the economy experienced a remarkable six consecutive periods of negative growth. Consequently, the UK surrendered their highly respected AAA credit rating, eradicating their reputation as a safe haven investment.

The problems may now not be so critical, but it is important to emphasise where the problems still remain.

Unemployment:

Presently, the UK’s economic problems are far less severe than before. One problem that still remains is their ongoing battle with unemployment. Recently, the quantity of people making jobless claims has decreased for a consecutive nine months. However, there is no denying that the current 7.8% unemployment rates are still remarkably high.

Lower unemployment rates hold an essential key to the currency increasing. The BoE are adamant that they will not consider raising their interest rates, until unemployment is consistent at 7%. This could take another two or three years.

Additionally, there is skepticism regarding whether the 0.7% 2nd quarter GDP growth will actually equate to any additional employment. Companies may still be cautious that the recovery is still in its preliminary stages, and may wait to see whether this recent resurgence will last.

High inflation:

Another issue that has severe ramifications for the value of the UK currency, is their stubborn inflation levels. Inflation is no longer as uncontrollable as the previous 5.1% levels would suggest, but the BoE are still trying to maintain them at under 3.0%.

The latest inflation reading was 2.8%, suggesting that the BoE still have an uphill battle to climb to attain their 2.0% target. High inflation levels are having negative consequences on the UK consumer, leading to low levels of disposable income. The Office for National Statistics recently announced that disposable income in the UK is at a 10 year low.

The Resurgence:

Retail has surpassed expectations in the summer months, and posted some impressive results. However, if disposable income is as stretched as suggested, it must be questioned whether these impressive results are being engineered through consumer debt.

Tourism has become an emerging exporter for the UK economy. In 2013 alone, there have been 15.2 million UK visitors, spending an estimated £8.72bn. This represents a sharp 11% increase on the same period last year. Although, in reference to the sterling currency, it is perhaps in the BoE’s interests to keep the value of the currency low, in order to keep capitalizing on this new growth.

What to look out for…Unemployment:

It is imperative to watch out for the UK unemployment statistics. This holds a pivotal key to the currency reaching newer highs. The BoE are adamant that they will not review increasing their interest rates until unemployment reaches a ‘threshold’ of 7%. However, with the UK really surpassing all recent expectations and the third and fourth GDP expectations being uplifted, many are suggesting this new profound economy confidence could well lead to an influx of future employment possibilities.

After all, the UK service sector growth is now at a six year high. The service sector employs 80% of the UK workforce and reports indicate that it is going to further expand. Manufacturing, construction, agriculture and retail are all expanding for the first time in over three years. The above has fuelled speculation that the unemployment rates could perhaps drop significantly before the winter period.

The British Chambers of Commerce has also raised its forecast for growth this year, from 0.9% to 1.3%. This has provided further indications of a sustainable economic recovery, possibly leading to a currency boost pre-christmas. After a previous turbulent period, the future for the UK is starting to shape up very brightly.  

By Jameel Ahmad, Research Analyst at Blackwell Global

 

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