Economic Forecasts for 2013

T1cker TapeGround Hog Day

It was interesting to see that several papers have picked up this analogy to describe what we can expect in the UK over the next year, inferring that the economy will be much the same as last year.  Interestingly this term and similar, such as ‘bouncing along the bottom  are seen as optimistic as they are a n improvement on some the forecasts made in November when the OECD cut its growth predictions for the UK.

The greatest concern is that the UK economy will remain in low growth not only in 2013 but for much longer in a similar way to the Japanese economy in the 1990s. Here measures taken by the Japanese finance ministry  to control the boom during the 1980s caused the economy to stagnate with high interest rates preventing firms from investing and some requiring investment from the banks to stay afloat.

We come once again to the argument between the Keynsian approach which sees  government fiscal policy positively encouraging growth rather than the approach proposed by Friedman  that promotes the role of the central bank using monetary policy to encourage growth by creating a favourable economic environment.  Currently the austerity policy of the UKs coalition government is based on cutting government spending and using monetary policy to encourage investment by the private sector to reduce the size of government, what ever approach had been adopted it would be unlikely that the UK economy would have recovered from the banking crisis as the problems in the EU and most recently in the US have both contrived to damp down growth.

Growth

There is unanimity that growth during 2013 will be poor at less than 1%, a level that is unlikely to change until 2015 according the Bank of England – however in general it is agreed that if the outlook remains as it is the UK will avoid the ‘triple-dip’ – but with forecast growth as low as it is any further problems in the Euro zone or a drop in confidence in the US would make this not just a possibility but a probability.

 

It must be remembered that economic growth is not just desirable it is essential for a healthy economy, a small change in the rate of growth in the economy  makes an enormous difference over time. For example the average growth of the UK economy historically has only been 1.97% – but although only twice the current forecast rate of growth this is significant.  A 2.5% growth sustained in mature economy over 29 years would double the size of the economy while in emerging economies growth rates of 8% or greater are achievable as resources are brought into production this has led to the doubling in the size of their economy in 10 years or less.

There are couple of external factors that are possible sources of UK economic growth, the emerging economies of South America are being targeted by UK companies taking advantage of the levels of growth over the past years and increasing cost for Chinese manufacturers.  The economies of several South American countries have been growing well throughout the recession experienced in Europe and the US based on extraction and exploitation of natural resources including oil and low cost manufacturing for the US market, this has created new markets for good and services that can be delivered by the UK. As standards of living rise in China this has stimulated domestic demand for products and created wage inflation just as demand from the US and Europe has been choked off, this has been made worse by the reduction of costs and mechanisation in UK and US manufacturing prompting some businesses to repatriate production to the home markets.

 

Employment

To the surprise of many employment in the UK has been good throughout 2012, in part through measures taken by employers and employees in agreeing wage cuts or reduction in hours and by growth in the private sector taking on roles previously in the public sector; the remaining growth in jobs it is assumed to be the result of an increase in part-time working.  In the longer term the regeneration of domestic production as noted above will play an increasing role in creating UK jobs.

It is assumed that this trend will continue in 2013 unless other factors intervene – one most likely to effect employment is the changes in welfare policy which might mean families currently receiving working tax credits might be forced out of work when these are cut.

Employment is a double edged sword it increases the amount of tax collected from employees and employers and it reduces government spending on welfare.  So employment is a key factor for the health of the economy over the next year.

Comment

Several pundits have vowed that they will not make predications for the economy as they are always wrong, the economy is too complex to call and any intelligence is out of date almost as soon as it is created, so having read the papers I will not make a forecast just a comment for today.

With the impact of external factors I have little faith in a fast turn around for the economy – but I believe that we will see the very slow growth continue through 2013.   My concern is for the longer term, if the current policy fails to create increased growth or at least more reliable growth in 2014 the UKs position in the world will be jeopardised.

On balance I believe the failure to invest in the economy by the coalition will lead to far more damage in the longer term and appears to be having insufficient effect in the short term.

 

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