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Interim Market Report 2011 - Economic Environment

Economic forecasts for global growth are becoming less positive. Western economies, in spite of exceptionally accommodative monetary policies, are experiencing sluggish growth. Fiscal deficits are historically excessive, personal indebtedness high and within the Eurozone the risk of sovereign debt default real. Against this the developing economies of the world are at risk of overheating. Inflation caused by excessive credit expansion and rising commodity costs are becoming a threat to stability. The global economy remains unbalanced and efforts to rebalance it by changing the pattern of demand are stalled. Given the fragility of the Western economies it is difficult to believe that the current pattern of global demand can be made good without some potentially serious economic shocks.

The economic situation in the UK is problematic with economic output still 4% below the level achieved in the first quarter of 2008. Whilst the number of people employed in the UK is above where it was in the boom year of 2006, and employment could be considered a bright spot, the UK economy is recovering more slowly than the rest of G7. In fact the UK was the last out of recession and its slow growth since is more a demonstration of how bad the economic situation in the UK had become. Whilst some are quick to blame government cuts in reality the biggest contribution to economic growth in the first quarter of 2011 came from public spending. Unfortunately government spending along with debt fuelled consumption is an unlikely source of future growth.

The deeper the problem, the longer it takes to resolve. With huge public and private debts in the UK, dysfunctional banks, a lack of competitiveness combined with rising oil and food prices, the recovery was always going to be slow. What the economy needs is a surge in exports and an increase in investment. Unfortunately the global economy is slowing and it is a concern that business investment fell in the first quarter of 2011. It is hardly a vote of confidence in the UK economy when companies are sitting on huge cash piles. What the government needs is perhaps a more coherent growth strategy. Whilst it would take even greater cuts elsewhere, reducing taxes, more deregulation and investment in infrastructure, training and education would all produce a more competitive economy.

There would appear to be no pain free solution from the economic situation in the UK or perhaps even the world. Given that interest rates in the UK can only rise from here, an extended period of sub trend growth and squeezed living standards are likely.

In spite of this, employment has held up better than we expected. The economy has created a net 375,000 compared with a year ago and at 2.4 million or 7.7% of the workforce, unemployment is falling. During the recession unemployment did not rise to the peaks that many expected and in spite of the many malign influences buffeting the UK economy the total number of people employed remains higher than in many other western countries.

Economic Highlights

UK economic growth in the first quarter of 2011 was disappointing and the economy according to the IMF’s latest forecast will grow by a below trend rate of 1.5% for the year. Given that government cuts have yet to impact the economy and the potential for economic shocks from the international economy, there remains significant potential for further growth downgrades.

At 7.7%, unemployment fell by almost 100,000 in the three months to April 2011. Overall employment remains a bright spot for the economy with the private sector creating over 500,000 in the last year. The total number of people employed in the economy now stands at 29.2 million.

The Bank of England continues to remain sanguine about inflation. However many remain concerned that with CPI inflation at 4.5% and RPI higher, inflation will become embedded in the economy. Interest rates have now been held at 0.5% for 28 months and it is a testament to how weak the economy remains that no rise is in sight.

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