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The immediate economic outlook for the UK is poor. Since the 2008 Global Financial Crisis (GFC), the UK has been a low growth, low productivity and low wage economy. Now, in the wake of the Autumn Statement it appears to be becoming a high tax and high public spending economy, too.
UK monetary policy leaves much to be desired – and we should examine the reasons why. The last week has seen both the US Federal Reserve and the Bank of England raise policy rates by 0.75%. There, however, the similarity ends.
This column is not going to comment on the political problems engulfing the UK. You will be able to draw your own conclusions from that ever-changing environment. But political uncertainty is hanging over the UK outlook, although the risk-premium that was attached by the markets to UK assets in the wake of the mini-Budget has all but gone. Instead, here, the focus is on the economic and policy environment.
The International Monetary Fund (IMF) has just released their global economic outlook. It makes sober reading. But it may yet prove too optimistic about the year ahead. As the chart shows, the IMF sees the world economy slowing from its strong post-pandemic rate of 6% last year, to 3.2% this year and 2.7% next year. On this measure, anything around 3% or below is very weak.
The mini-Budget on Friday triggered a major sell-off in UK assets. The pound was hit hard and UK borrowing costs rose.
The immediate outlook for financial markets remains complex. The world economy is slowing. In turn, inflationary pressures appear to be easing, highlighted by the recent continued fall in oil and commodity prices.
Where should interest rates settle? It is a key economic issue that has figured even in the Conservative Party leadership debates.
Inflation has figured prominently in our various webinars and comments since early last year. After the global recession and worries about growth in 2020, in the first few months of 2021 inflation became one of our major concerns.
The fundamental challenge facing the economy is the need for stronger, sustainable growth. This is not a new problem and dates from the 2008 global financial crisis. In its wake, the trend rate of economic growth slowed sharply and has never recovered.
There is much pessimism about the UK now. There are many reasons for this but factors that figure prominently include wariness of the Bank of England and monetary policy, pessimism towards sterling and – more recently – concerns that the tight UK labour market may not only feed current inflation but raise concerns about whether the UK’s growth potential is low.
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