Bellerbys Economics - Mr Stephenson

Friday, March 31, 2006

British Economy Update

The British Economy is finding itself in a little bit of a tight corner at the moment. The current account deficit is at its highest since the time just before the last stock market crash in 2000 - so now would be a good time to sell your shares - history has a habit of repeating itself in Economics! That figure is 2.6% of GDP which is sustainable as we have a very open economy and so it's easy to attract money into the country at the moment by selling assets - mostly UK companies being sold to overseas companies. But it's possible that the 'best buys' have already been made and there may be less willingness to buy the remaining UK companies in the future. This means we may need to raise interest rates to attract financial rather than direct investment. Interest rates are currently 4.5% which is low compared to the USA's 4.75%. You would expect UK rates to be higher than the USA which has a larger currency. If the deficit pushes above 3% of GDP, we could be in real trouble with a rapid fall in the value of the pound being the only way out (but this would be good for Bellerbys students of course!)

Retail activity is down on last year with GDP growth predicted at only 2% (UK population will increase by 1% this year). With house price rises stalling, making it more difficult to borrow money, it will be difficult to overcome this problem through demand-led policies - the government already has a budget deficit of 3.1% of GDP and would be running a risk in borrowing more.

Meanwhile traffic infrastructure is so poor that the OECD has dropped us down to 9th place in terms of competitiveness for investment - the OECD list is one way of measuring our success at using supply-side policies - Singapore is top of the list.

Meanwhile, some good news for some of our students - the price of shares in Kazakhmys which launched on the stock market six months ago have already doubled. Whoever bought shares in this Kazakh copper company when it was launched will be very happy indeed!

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