Things certainly seem to be looking up for the economy as 2014 reaches its mid-point. It has taken a while since the economic crisis first began back in 2008, but after a double-dip and arguably even a triple-dip recession, the UK experienced a significant period of growth in 2013 which looks set to continue in the coming year and through into 2015.
Predictions and expectations
A review carried out by the Treasury in the early part of the year showed that most of the financial institutions surveyed thought 2014 was going to prove a better year than 2013. The only thing they could not agree on was how improved economic growth would manifest itself.
Growth has been confirmed by two independent lobby groups, the CBI and the British Chambers of Commerce (BCC). The month of May, according to the CBI, saw record growth, while the BCC predicted that 2014 would see expansion reach 3.1%, which if true, will be the highest rate of economic growth since the financial crisis began. The government’s fiscal watchdog, the Office for Budget Responsibility (OBR) has corroborated these findings, with figures that show the UK economy grew by 0.8% in the period from January to March. Growth was particularly strong in the retail sales and consumer and professional services sectors during this period, while manufacturing, previously believed to be a dying sector in in the country, enjoyed a noticeable and steady increase in output. Whilst the director general of the BCC celebrated the continuing economic improvement, he admitted that Britain is not out of the woods yet and expressed concern that much of the nation’s growth comes from consumer spending.
This should have an, albeit, slight knock-on effect. As the nation’s Gross Domestic Product (GDP) grows, it is expected that more jobs will be created, thereby reducing overall unemployment levels, although with an average 2% GDP growth, it is likely unemployment will slightly below 7% until 2016.
There are two areas which could directly impact upon the UK economy, either positively or negatively; the first being bond yields. The Bank of England has tried to reduce these, but is hampered by a lack of direct control. In pursuance of this, the bank has used newly printed money to buy government bonds, which has resulted in pushing the bond prices up while lowering the yield. It is unfortunate but these have been affected mostly, not by events in London, but by action taken in the U.S, specifically Washington D.C. When the American Federal Reserve raises its interest rates, the Bank of England usually follows suit and this would significantly slow the UK recovery, especially in the consumer sector. Credit cards and mortgages would become more expensive and as people begin to struggle to pay off their debts, they would have considerably less disposable income to spend in the shops.
The second area of concern is foreign exchange. As the UK economy strengthens sterling becomes more attractive to investors. They begin to buy assets using foreign currency and sterling starts to appreciate. This has a negative impact on the country’s exports, as UK produced goods become more expensive in overseas markets, threatening an already fragile balance of trade. In order for the UK recovery to continue, it would be highly beneficial for sterling to remain relatively cheap, especially as one of its major export destinations, the USA, also begins to recover from the recession.
Two of the sectors that analysts predict will enjoy considerable success are technology and industry. In regards to technology, this sector is perceived as being one of innovation and entrepreneurialism which can only benefit the economy in surprising and sometimes unexpected ways, often outperforming financial projections. It has also settled down to become less volatile and is now considered a stable stock market performer.
The industrial sector, meanwhile, is similarly expected to outperform predictions. Both these sectors benefit from designing and producing goods and services which make other companies more efficient and as such investors will be looking to put their capital into businesses that are able to deliver a competitive edge.
Despite these statistics, the economic future is by no means certain. The ongoing crisis in the Eurozone where recovery is predicted to be only modest, if non-existent in some countries such as Finland and Croatia, during 2014 and the unstable political situation in the Ukraine, could impact heavily on the UK economy. Financial predictions in these areas are extremely difficult to make as the situation, especially regarding the latter, is so fluid.