Wednesday, 11 August 2010

Britain's economic plight - the calm before the storm

It’s hardly surprising that according to the most recent survey, consumer confidence in the UK is at a lower ebb than almost anywhere in the industrialised world. The public has no idea what is around the economic corner but they suspect it’s going to be nasty.
Mervyn King, governor of the Bank of England, today warned that inflation will be higher and growth lower than the Old Lady’s last assessment. At best he forecast a “choppy recovery.”
It makes no difference I’m now on the outside looking in after more than 30 years as a financial journalist. When I read the City pages in today’s newspapers I get no sense the pundits have a clue how the next 18 months will play. To their ranks you should probably add the Tory-LibDem Coalition government.
Consumers have good reason to be cautious. Prices are set to rise next year on the back of higher fuel and commodity prices – a weak £ favours exporters but makes imports more expensive. And this is even before the VAT hike announced in the Budget. It is no wonder High Street bosses are sounding warning signals.
So far the jobs squeeze is yet to bite. This is, in part, because under-pressure employers in the private sector have tried to retain trained staff by introducing part-time work rotas. Full-blown redundancies may be on the way.
The Government intends taking an axe to Britain’s public sector to conquer Labour's legacy - the debt mountain. This will mean massive jobs losses among civil servants and cancelled contracts for private industry.
It plans to re-balance the economy so that the country earns its keep in world markets relieving taxpayers of the burden of supporting a public sector where growth ran wild under Labour.
Prime minister David Cameron needs to show results before the next General Election comes round – hence the speed of the reforms/cuts. Nobody knows if he can pull it off – I would bet him included. He cannot depend on the placidity of the unions, Labour continuing to be diverted by the leadership struggle, or Coalition malcontents remaining silent for much longer.
Rock bottom interest rates are an illusory boon. It doesn’t matter how cheap money is if banks won’t lend it because of liquidity restraints.
The feel-good factor of Labour’s first decade in power was built on the shifting sands of low interest rates and soaring house prices. Consumer spending became increasingly the engine of the British economy – shoppers came to look on house price inflation as money in their pockets. And they spent it.
That source of economic growth is gone – so too is the belief that the financial services sector was destined to expand forever. This leaves us with our one genuine ace – sterling’s depressed value.
This should help the UK promote foreign tourism at home and win business abroad – given that there is a sustained recovery in the world economy. Britain does have talent especially in the new technologies but it can't be nurtured if our educational system is to be decimated.

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