Not all doom and gloom in the UK

There is a particularly depressing headline in the UK Telegraph stating that Britons will have to work until the age of 70 to bring public debt under control.  The NIESR who made the prediction believes that the UK will have to take drastic measures such as raising the retirement age, drastically raising taxes, and/or sharply cutting spending to reduce the debt burden in the wake of government borrowing plans amounting to £175 billion (see A taxing time in the UK).  

All of these look unpalatable but there is little choice otherwise future generations will have to pay a heavy price and/or investor demand for government debt could collapse.   At the same time the NIESR forecasts that the UK economy will drop by a whopping 4.3% this year, which is more pessimistic than government forecasts.   

The size of the debt burden is clearly distressing but by now most of us have likely got over the shock of the budget announcements.  Although the issue will not go away quickly attention is turning to some positive signs emerging in the UK economy and the housing market.  For instance, amidst the gloom of the NIESR predictions they also forecast that the economy will begin to grow again in the fourth quarter of this year.   

There was also a separate report just released showing that UK consumer confidence rose the most in close to 2-years according to the Nationwide.  Importantly, the gauge of future expectations rose sharply, suggesting a recovery in the months ahead.  Added to evidence that mortgage approvals have risen to a 10-month high, whilst manufacturing and service sector confidence have improved, it looks as though the economy and the housing market are finally beginning to bottom out.    

All of this will take some of the pressure off the Bank of England but it does not mean that the BoE’s £75 billion asset purchase plan will be scaled back any time soon.   Moreover, interest rates are likely to remain on hold at the low level of 0.50% for several months to come, which in turn is good news for consumers and borrowers alike.   So, perhaps its time to shake off the gloom and look ahead as the worst for the beleaguered consumer has likely passed.

Advertisements

2 Responses to “Not all doom and gloom in the UK”

  1. UP Says:

    I’m not so sure the worst is over for the consumer has passed. Its likely that once economy gets back on track, inflation could rear its ugly head, and very quickly. If this is the case, interest rates will too go up quickly (providing the BoE’s target hasnt moved). In any case, taxes too (VAT and income) will increase to help pay for the over expenditure and bailouts. All this could be further bad news for house prices and Ive not even mentioned unemployment and an insolvent financial system. How about the consumer making the most of low interest rates while they can!

    • Mitul Kotecha Says:

      You make valid points but I think the support provided from ultra low interest rates (note the BoE increased its asset purchases yesterday), a weaker pound and massive fiscal stimulus will provide a good kick start for the economy. The question is whether the kick start will turn into anything more significant. Clearly there is still a huge private and public sector debt overhang which will play on the long term health of the economy and yes probably mean either higher taxes, a higher retirement age, or massive reductions in government spending, but I do think that things are not going to get worse from here. I also don’t want to sound bullish as there is a long road to recovery. I also do not think there is a major inflation risk unless the BoE is slow to remove its QE policy when the time is right. As for house prices it will be a similarly slow road to recovery and at best prices will stabilise over coming months. In the end as you note, perhaps the consumer should make the best of low rates for now.


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: