Friday, 6 September 2013

Economic Resurgence and Roadblocks

I don't think anyone in the Conservative Party is in any doubt that if we're going to win in 2015 the main reason for this will be the economy. We've got to make sure the economy is healthy or well on the way to being so by 2015 or we have no chance of victory. Since my last economic post the picture has got a lot rosier but what are the big roadblocks to a stronger economy.

UK economic pigs on the increase.

The good news is that we are predicted to grow more than anyone thought this year. The OCED, who said that we would grow at most by 0.8% this year, has massively increased their prediction to the UK growing by 1.5%. Indeed it gets better when you look at the annualised rate of growth which is 6% meaning we're growing faster than France, Germany and America (pretty good going). Of course we shouldn't be too optimistic because these are predictions we must wait for the results until we starting patting each other on the back and celebrating an end to a depression. 

The UK in real terms is out preforming Germany and probably will continue to in the future.

This growth is also pretty sustainable, built on the increases from all sectors of the economy. Factory production is seeing a boom that could only be compared to one that took place 20 years ago. Car production is soaring as well (which Top Gear has tooted a lot). The Service Sector is really getting some pace now on the back of increased high street sales (despite threats from the interweb and out of town shopping). Construction figures are the best they have ever been for 6 years. And most importantly Lego has seen a 17% rise in sales. All sectors of the economy are growing, which, apart from last month, has only happened in 1991.

Lego is on the increase.

The best news however is twofold. Unemployment is down and will continue to fall. Expect an increase in the 1.3 million jobs that that have been created in this country since 2010, a good record for the Conservatives in government. The growth in the economy also means tax revenues are up for the government which is good for deficit reduction because the shortfall of tax has led to the deficit falling less than expected by the Chancellor in 2010. Perhaps we will pay off more of the deficit than expected?

All areas of the economy are growing creating more jobs in ares like the car industry.

But this actually leads onto the start of the bad news because the days when cheap government lending is over. The small window we had to pay back or debt with the least cost has virtually closed because yesterday the cost for the UK government to borrow reached over 3%. This is an international rather than a purely UK problem and is an inevitable shift where bankers and other countries realise that governments are not very good at paying back loans. So now each Pound in debt is a bigger weight on the future of the UK. 

Interest Rates are likely to be at an all time low for a very long time.

Also we may see a problem caused by the Bank of England keeping the rates of interest at 0.5% for 3 years (despite some caveats). This move is good for stability as businesses have a pretty clear picture of what to expect of the future, but it's not as brilliant a move for lending as people may think. Although we have started to create more wealth with economic growth, we have a capital problem still in the UK. Cutting taxes would aid this partially but we really need to be encouraging people to save so their money can be leant out, this can be done by raising interest rates. Although a low interest rate will make people want to borrow more it is impossible to do so when there is very little money. If I was Governor I'd start thinking about raising interest rates sometime in mid to late 2014. 

Inflation is something to watch out in case there is a big increase.

Inflation may become a big problem too because the government is going to start trying to get rid of as much as this debt as possible by decreasing the value of money. It has already done this quite a lot with almost 25% of the deficit that paid off by printing more money. With more quantitative easing possibly on the way, the government increasing energy bills and interest rates remaining at a standstill inflation is likely to increase. Bad for business and for people's buying power. Inflation is not something that any government wants to increase and especially before an election which Labour will fight on the cost of living.

Cue Union Flag piggy bank surrounded by money.

So there we are, lots of good news about growth, profit, jobs and deficit reduction but things to watch out for in the next coming years and possibly some mistakes made by the Bank of England and the Government.

Also, what do you think to the new look of the Blog? If you like it then good, if you don't well you'll just have to put up with the blue, red and white combined with a new logo.

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