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Taking stock - 2003
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| Despite US inspired optimism from UK Business Managers in the
latter part of 2002, there are few indicators of substantive growth
drivers for the Economy in 2003 - which is encouraging the best
and most competitive Companies to rely on their own initiative to
buck the unhelpful trends. |
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The Impact of the Consumer
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Robust consumer spending and a house price boom have cushioned
the British economy from the worst of the global slowdown. However,
the manufacturing sector is stuck in a deep rut due to a slump
in world trade and the strong pound.
With over 60% of UK GDP based on Retail, there is a risky over-dependence
on consumer spending as the driver for economic growth and indicators
outside of the already weak Christmas spending show that we may
be reaching the limit of consumer spending outpacing the overall
economy, particularly with Consumer Debt at record levels.
And although consumer spending is still likely to grow by 2.5
per cent this year we now expect a fall in 2004, the first time
this will have happened since 1991.
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Interest rates and Corporate Confidence
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While the UK has been outperforming Europe in both growth and
interest rate differential, most recently published surveys indicate
limited prospects for the UK economy forcing the Bank of England
to cut interest rates during the year.
Medium size companies are facing uncertainty on all fronts -
from oil prices to the Chancellor's fiscal forecasts prompting
significant falls in output expectations last month. Indicators
are that economic growth will be disappointing in the early part
of 2003 with these key UK economy, mid-range Companies - up to
£100m - more cautious about growth prospects for their businesses
and the UK economy than 6 or 12 months ago.
UK economic growth of just 1.7 per cent in the first quarter
of 2003, a likely 1.4 per cent during the second quarter and 1.9
per cent in the third quarter - suggests that the Government has
only the slimmest chance of reaching its optimistic two and half
per cent growth forecast this year, and may even be forced to
revise its calculations in the April Budget.
Inflation will fall back to below the Government's 2.5 per cent
target early this year but the biggest catalyst for a sharp slowdown
in spending growth could well be the collapse of the housing market.
In the past, such deceleration in the housing market have, without
exception, been accompanied by a fully qualified recession in
the overall economy. On this occasion, hopefully, the blow should
be cushioned to some extent by a fall in interest rates to 3.5
per cent.
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Where's the corner for turning?
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Looking to Europe - Spain will lead the economic growth league
with the UK in second place - France third. Germany will see growth
of 0.25 in 2002 and maybe 0.75 percent growth in 2003 exerting
a very heavy downward pull on the rest of the euro zone with growth
unlikely to be any more than 1.25 percent.
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Unemployment is increasing and that is hitting consumer optimism
dramatically in both Europe and in the US the forecast is that
the holiday season spending was the weakest for 30 years.
The Confederation of British Industry (CBI) has reported the worst
run-up to Christmas for 10 years in a survey covering the period
December 4-18.
Sales of clothing in France has been particularly weak due to
warm weather. In Germany, Europe's largest economy where consumer
demand also accounts for up to 60 percent of gross domestic product,
retail sales hit the buffers many months ago as the economy stagnated,
down from a year ago and retail sales are set to fall again this
year.
A dismal holiday shopping period in the United States mirrors
Europe's experience and Continental consumers, faced with the
prospect of war in Iraq and uncertainty over job prospects, reined
back their usual exuberant Christmas spending this year to a point
which could threaten Europe's economic recovery.
In Italy, a leading consumer group last week described Christmas
sales as a flop as business confidence dropped to an 11-month
low.
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The Pound - a bright Spot?
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There will be no volatility in the pound this year as any upside
will be controlled by the cooling economy. This after a long period
of relatively strong performance compared to other major economies
will probably see the Pound running to $1.61 in February and $1.62
by year end Forecasts for the dollar against sterling in 12 months'
time. This said, forecasts are still currently ranged from $1.4400
to $1.7200.
Tony Blair has pledged to assess the economic case for Britain
joining the currency bloc by June and to put the question of euro
entry to the public in a referendum provided the British and euro
zone economies have sufficiently converged. He made it clear on
January 7th that Britain must join Europe's single currency if
the economic conditions are right.
A mid-range forecast shows the euro around current levels against
the pound during the next six months and at 65.24 in a year's
time.
Given the uncertainty in growth will Gordon Brown follow the
US lead and stimulate growth through smart tax relief?
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