Perusing through the online Guardian newspaper this afternoon I found one particular article, dated from the 15th of November, which caught my eye. It is very relevant to the topics we've been discussing in class and was also very interesting to read as it discussed the outlook for the UK economy over the next year as a result of the current financial market turmoil. According to Mervyn King, governor of the Bank of England, the period ahead will be marked by slower growth, rising inflation, a weakening housing market and a falling pound. With this, King signalled that the next year will be the toughest for Britain in a decade.
Title of Article: Bank's grim warning over UK economy
Source: The Guardian
Date: 11/15/07
On Wednesday, the 14th of November, Mervyn King issued a stark warning of an economic slowdown to the Britain society. In addition to the aspects mentioned in the introduction paragraph above, King also warned investors of a sharp fall in share prices and stressed that even the two quarter-point cuts in interest rates pencilled in to the Bank's forecasts would not spare consumers from a painful period of belt-tightening next year. In fact, King gave no hint that interest rates would be cut any further soon.
King cited 2009 as the year when growth will pick up and inflation will be brought under control. With oil prices as high as they are now ($100 per barrel) and the fact that food prices have increased by 10% in just the last three months, King hinted that it would be some time before the Bank responded to economic weakness by cutting the cost of borrowing. The combination of the tougher borrowing conditions imposed by lenders in the wake of the credit crunch and Threadneedle Street's monetary policy committee raising interest rates five times between August 2006 and July of this year could and most likely will spell the end of the UK's recent property boom. As house price inflation is easing and commercial property prices are falling, it is believed that residential and commercial property investments are likely to moderate at a rather sharp rate. With tighter credit conditions in the future, the personal saving rate is likely to rise, which will ultimately decrease consumer spending.
As mentioned in the introduction, King warned of a fall in the power of the pound. He said that the pound would need to fall in order to boost exports and to close the UK's £7bn a month trade deficit in goods. While the pound has been extremely powerful against the dollar recently, it has hit a four-year low against the euro. This lowering in strength may serve as a forecast to its overall decrease in power.
King also mentioned that equity prices are on average higher now than they were in August. He said that this was also true around the world and in emerging markets--they're 20% higher. A fall in equity markets, the governor said, could have a bigger impact on the world economy than the recent credit squeeze.
While the outlook for the UK economy in the near term is one of slowing growth and rising inflation, King said that the long term outlook is a return of growth to its average rate and the lowering of inflation back to its target.
After reading this article, I couldn't help but think about crises that occurred in the past and relating them to the current turmoil the UK is experiencing. After any situation as serious and severe as this one, it will always take a substantial amount of time and planning before the economy is repaired and back to running smoothly. Take, for example, the Great Depression in America. The economy slumped considerably and conditions worsened for everyone. As bad as the Depression was, America prevailed and became strong once again (although now the economy is suffering again as a result of the same crisis going on in the UK). What I'm trying to say here is that things take time to resolve. Once UK officials have a plan then their long term outlook of returning growth to its average rate and lowering inflation back to its target will come to fruition. Interest rates will also most likely go down, the housing market will be back up to par, the pound will level and equity will increase. If officials work together and devise a way to "pick up the pieces" caused by the financial market crisis, I am confident that the economy will once again pick up and things will be returned to how they were before the crisis hit. I'm not exactly sure how the officials will do this in terms of the specific regulations and changes they need to make because I am not very educated in this department, but I am confident that they will find a way.
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