Every year based on information from economists and publications I make predictions on the economic outlook for the year.
The UK Economy came out of the second dip in the third quarter of 2012. But the economy shrank by 0.1% in the three months to February, the National Institute of Economic and Social Research estimated, which followed a 0.3% decline in the final quarter of last year. If the economy continues to contract for the three months to the end of March, the UK will officially be in its third recession since the financial crisis of 2008. Judging by poor manufacturing figures it is likely that the UK will hit a triple dip, but not for long. Ernst and Young Item Club (ITEM) believes the most likely outcome is that the UK will muddle through staging a slow revival as balance sheets, real wages and relative house prices continue to adjust. ITEM expects to see stronger figures emerge in the second half of the year, with GDP growing by 1.9% over 2014 and 2.5% in 2015.
The budget deficit is the annual amount the government has to borrow to meet the shortfall between current receipts (tax) and government spending.
Public sector net debt was £1,161.5 billion at the end of February 2013, equivalent to73.5 % of GDP, up from 62.3% of GDP in 2012. The sharp growth in national debt started in 2008 because:
(i) 2008-13 recession (lower tax receipts, higher spending on unemployment benefits) The recession particularly hit stamp duty (falling house prices) income tax and lower corporation tax.
(ii) These cyclical factors have also exposed an underlying structural deficit. (deficit caused by spending greater than tax, ignoring cyclical factors)
(iii) Financial bailout of Northern Rock, RBS, Lloyds and other banks.
The deficit is falling – but more slowly than the Office for Budget Responsibility forecast in December. This year’s deficit is forecast to be 7.4% against last year of 7.9%.
According to the Office for National Statistics just over a year ago in February 2012 unemployment stood at 2.66 million compared to 2.52 million recorded in January 2013. Chartered Institute of Personnel and Development forecast despite a weak start that employment will continue to rise throughout the year by 1.3%. ITEM predict a rise in employment this year by 244,000.
Inflation will remain above the Bank of England’s 2.0 per cent target throughout 2013 as utility price rises feed through. Inflation crept higher between January and February, hitting 2.8 per cent as households forked out more for rising energy bills and the weak pound made imported goods more expensive.
The rise means that inflation is now even further above the Bank of England’s notional 2.0 per cent target and economists are warning inflation could hit 3.5 per cent by the summer.
With the above inflation forecast, and prospect of a triple dip recession it is highly unlikely that the Bank of England will increase interest rates in 2013. Some leading economists believe that interest rates will stay as low as 0.50% for a further two years. Citi Bank said it expected the Bank of England to keep rates at 0.50% until mid-2017.
Value of Sterling
The pound will take a pounding this year as investors choose to invest elsewhere. The value of sterling has tumbled by over 7% against the dollar and the euro since the beginning of 2013. The downgrading of UK’s credit rating did not help, as the pound on the day of the downgrade took a further tumble of 0.36% against the dollar and 0.48% against the euro. However this could help GDP growth as a fall in sterling will benefit any exports the UK makes. This is because UK products will be cheaper for people from other countries to buy, but at the same time it also makes what the UK buys overseas a lot more expensive. Nevertheless we are in a global recession and although the pound will take a pounding this year tumbling against the dollar and euro it will still be stronger but not by much.
One of the country’s biggest mortgage lenders has recently revealed its 2013 predictions and it points to a pretty flat market. Halifax says that house prices will change very little in 2013, and predicts house price rises of up to 2%. The lender forecasts broadly stable house prices nationally in 2013, but admits the outlook for both the wider economy and house prices remains more unclear than usual. It believes that housing demand could be constrained this year because of sluggish economic growth, sustained high unemployment and pressures on household finances.
Carlo Pegna LL.B (Hons), F.Inst.L.Ex, MICM
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