The forecast for the UK economy in the year ahead is not looking as rosy as it has been over the last few months. There is a fair bit of uncertainty that has been caused by the recent decisions by the Bank of England and the Bank of Scotland to start their quantitative easing measures. This in turn has had an adverse effect on the equity markets across the UK, with many stocks going down and many companies closing. However, the stronger Pound and the reduced deficit will hopefully provide the UK market with some much needed respite over the coming months. In the meantime, we have put together a series of articles comparing the UK economic growth compared to that of Euro2019.
One of the things that is starting to emerge from this rather gloomy economic outlook is the fact that the UK economic recovery is certainly getting underway. Although it is still early days yet, there are enough signs pointing to the fact that the recovery is taking hold and that the Bank of England is definitely keeping its feet firmly on the ground. This should hopefully provide the British people with some much needed respite over the coming months.
One of the things that the Office for Budget and Management has been looking at is the ways in which the UK economy can be supported over the coming quarters and years. In addition to this, the OBR has also looked at how the economic recovery in the United Kingdom can be extended. These key considerations have led the OBR to look at the economic growth in the UK against that of the Eurozone as a whole. The OBR believe that the UK economy could sustain quite rapid growth, but that the rate of growth would need to be more sustainable than that of the Eurozone. They also believe that this gap will widen rather than contract over the period ahead.
When compared to the Eurozone, the UK's economic performance has been stronger in the past two years. It should, however, be remembered that the two years prior to this only saw growth of up to three percent. Over the course of the last twelve months, growth of up to five percent has been registered. This compares well with the other areas of Europe, where economic growth has been much higher, but with less volatility.
As these factors are taken into account, the OBR has come to the conclusion that the United Kingdom is performing against its economic potential. In addition to this, they state that the economic recovery in the UK will be facilitated by the measures that the Government is putting into practice. These include measures to increase productivity, reduce the cost of living through increased regulation and increase access to credit. Taken together, these aspects should see the UK economy able to sustain its recent pace of growth, which should see it performing against all Eurozone countries.
The report goes further to state that the long term prospects for the UK economy do not look particularly rosy. Eurozone countries, led by Germany, have indicated that they plan to keep the current rate of economic growth at three percent, which is the same as the UK's official target. Moreover, it should be noted that while the Eurozone as a whole is growing slowly, there are some areas in which it is faltering, notably in Portugal and Ireland. Even Spain is in recession in this respect, though the recession is far less deep-seated than in the UK. The overall effect of the state of affairs has been that trade within the Eurozone is becoming more uneven, with some areas growing faster than others, with the gap widening between the peripheral countries . . . . . . and the core countries.
The future, it is argued, is far from clear. The key issue is whether the sustained rise in economic output can be sustained over the longer term. If one looks at the longer term economic climate, there is little to show that investment in infrastructure and technological developments can support higher growth in a similar way to the UK. In fact, if you look at the recent record of UK economic performance, it seems to suggest that the UK economic model will not be able to sustain such high rates of economic growth for the long term.
In short, we do not see the UK having a competitive advantage in the years ahead. It is true that the single currency has been able to preserve the UK economic recovery, but this depends largely on the strength of the euro and the US dollar. The euro has also kept the economic core of Europe relatively insulated from any financial crisis in the United Kingdom. On the other hand, the US dollar remains the main international investment vehicle, especially in the years ahead. If one adds all of the above together, it appears that there is very little that the UK government can do to retain its pre-eminence as the preeminent economic powerhouse in the years ahead. To make things worse, official growth forecasts seem to be getting weaker, which only makes things worse for UK companies.