The UK could be making a return to the G8 fast lane next year, with the latest report from BDO Stoy Hayward suggesting that the economy should grow at the annual rate of 3% by the second quarter of next year.
It’s the service sector that is leading the UK into this apparent recovery , with the BDO optimism index for services seeing a sharp rise. It was all due to the August interest rate reduction, solid gains in stock markets, and relief at no further terrorist incidents. The positive sentiments from our services helped lift the BDO optimism index, which relates to growth two quarters ahead, to 101.2 from 100.4 in July. And this rise came despite a slight fall in the optimism index for the manufacturing index.
But while we should cheer the latest report from BDO, it is perhaps worth treating the findings with a degree of healthy cynicism. After all the BDO optimism index was even higher this time last year, but in fact the economy subsequently slowed - suggesting the report’s conclusions were not as portentous as first thought.
And while the BDO report makes pleasant reading when looking at Q2, the first quarter of next year is not so promising. The BDO output index, which relates to changes one quarter ahead slipped from 99.6 in July to 99.3 in October 2005, implying annualised economic growth of around 2.2 per cent in the first quarter of 2006.
But when it comes to the rate of interest, the tealeaves are even less promising. The BDO inflation index increased from 101.7 in July to 104.8 in October, implying that the Consumer Price Index (CPI) will continue rising at a rate close to the current rate of 2.5 per cent, leaving no room for a rate cut.
The National Institute of Economic and Social Research also predicted a rate of interest staying on hold last week. The NIESR report said that despite the UK economy slowing to enjoy growth of just 1.7% this year, and expected to rise to a below par 2.3% next, and despite the rate of growth in consumer spending this year and next expected to be half the level seen in 2004, consumer prices will rise by 2.6 per cent in the year to the final quarter of 2006. And the economic think thank reckons there’s a 60% chance of inflation being above target with unchanged interest rates.
Capital Economics appears to be out on a limb. It’s the only high profile economics forecasting group still expecting further falls in the official cost of borrowing.
Perhaps more worryingly, the NIESR predicts the UK economic trend rate of growth in the period to 2013 to be 2.4 per cent a year, reflecting lower growth in labour input. If they are right, then the government will have more problems than ever balancing the fiscal books, and it will become more likely that taxes will rise, further dampening growth.
Finally, to offer complete balance to BDO’s optimistic survey of the UK’s prospects, the CBI says our smaller manufacturers are in recession, although actually, there was a slight improvement on the CBI survey from July, with the index rising from -27 to -24.
Hugh Morgan-Williams, chairman of the CBI’s SME Council, said: “Small and medium-sized manufacturers are a good barometer of future economic progress. They are the first to feel the effects of an ill wind and the last to recover.” He added: “As the consumer spending slowdown filters into other areas of the economy, SME manufacturers have now experienced three consecutive quarters of falling output and are technically in recession.”
We do wonder whether the fundamental problem inflicting the UK is caused by successful economic management. We are enjoying our longest run of uninterrupted economic growth ever, the damaging stop go cycles of yester year seem to have been banished to the history books. But maybe business needs the occasional cull, the occasional sifting of wheat from chaff, which creates lean efficient business, able to take on the world.
Comments
Trackbacks