With recent economic reports showing some ground for optimism, are we starting to see the beginning of the end of the longest recession the UK has witnessed since records began?
Monday 4th January saw an optimistic stock market perform better than expected on the back of improved UK factory activity. This, combined with a growth in the Chinese factory output, suggests that the New Year has brought some new optimism.
Before we all get carried away, I think these signs of optimism should be viewed in the wider context. The UK economy is still in recession; quantitative easing has seen unprecedented low rate of interest and the public deficit has ballooned to be the largest amongst the G20.
This will be the ‘crunch year for the UK’, and with an election in the first half of 2010, we have seen all the main political parties offer their early indications of what they will do if they are elected to office this year.
Already the traditional election promises are appearing a little hollow. The problem is that it is difficult to promise much when the cupboard is not only bare, but is also at the pawn brokers! There is some doubt over the UK’s long-term ability to repay its debts and this has led to speculation whether the UK economy will retain its triple ‘A’ rating. If the UK’s financial ratings were to slip, it would have devastating effects on the already fragile economy. Many of the UK’s long-term loans would become considerably more expensive as the interest rates would increase on the remaining debt.
For an economy based on financial security and stability we are riding on the back of a tiger. The international economic community is waiting to see which way the UK will turn when the debt starts to be paid back. How will the funds be obtained? We know that taxes will need to be increased and public sector spending reduced. In short we will be paying more for less. How long and to what extent this will impact on the UK’s economy will depend on the Government’s approach to the problem. The economic environment of the UK for the next five years will be decided by the Summer of 2010 but until then, business will hold it’s breath and, I hope, keep its nerve.