In the latest issue of the Deloitte Economic Review, Deloitte’s Economic Adviser, Roger Bootle, looks at whether the UK is well placed to take advantage of the opportunities created by the strength of world demand. His main points are as follows:

• The large and booming markets of Asia, such as China and India, provide a golden opportunity for the UK over the long-run. And the resurgence of a more established nation, namely Japan, improves the prospects for UK exporters further.
• But the UK’s presence in these markets is currently tiny. And although the UK may be well positioned to increase its market share in the future, the Asian boom is unlikely to have much of an impact on the UK economy over the next few years.
• Given that the UK sends over 50% of its goods and services exports to the euro-zone, the recent improvement in the economic prospects of the single currency area could be more significant. Indeed, the euro-zone could be finally about to emerge from its economic torpor, as the optimism of forward-looking surveys has started to show up in the hard activity data.
• But although some businesses are likely to feel major benefits from a pick-up in economic activity on the continent, the scale of any euro-zone recovery is likely to be modest compared to what is going on in Asia, and compared to what the UK needs to have much of an impact on its trade balance.
• The best prospect in the next few years may appear to come from the oil exporting countries which, thanks to the high oil price, are sitting on large current account surpluses. And the UK’s presence in these markets is significant. However, they do not account for a very large proportion of British exports so even a big increase in these countries’ imports would not transform our trade.
• On top of all this, with the UK sending 18% of its exports to the US, the prospect of a housing market-led US economic slowdown over the next year or two, or possibly even a recession, could further dampen the potential for strong UK export growth.
• The upshot is that although Asia offers British exporters huge opportunities in the long-term, at the moment UK exporters are not well placed to reap the benefits. If the external sector is to shoulder the burden of propelling UK growth over the next couple of years, it will take a lower pound to increase the UK’s competitiveness.
• That is something which monetary policy could help to bring about. With the weakness of the UK economy over the last 18 months implying that underlying inflation pressures have further to fall even if growth accelerates above trend, the prospect of a significant undershoot of the inflation target will bring interest rate cuts back on to the Monetary Policy Committee’s agenda in the second half of the year.
• With interest rates in the US now higher than in the UK, and with euro-zone rates likely to rise to 3.5% by the end of the year, further UK rate cuts may bring about the fall in the pound that the external sector so badly needs.
  But this would not necessarily mean that the UK economy is set for a phase of rapid growth. Indeed, with the consumer slowdown yet to run its full course, GDP growth is likely to accelerate only modestly, to around 2% this year and 2.5% in 2007. 

Ends

Notes to editors

Read our executive summary and download the Economic Review for quarter 2 2006.

This press release has been prepared by Roger Bootle, Economic Adviser to Deloitte.  If you have any questions regarding the views in it, please contact Roger Bootle directly on 020 7823 5000 or via email on business@capitaleconomics.com.

This press release contains general information only and is not intended to be comprehensive nor to provide professional advice.  It is not a substitute for such professional advice and should not be acted on or relied upon or used as a basis for any decision or action that may affect you or your business.  Deloitte & Touche LLP accepts no duty of care or liability for any loss occasioned to any person acting or refraining from acting as a result of any material in this publication.

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Deloitte & Touche LLP is authorised and regulated by the Financial Services Authority.

The information contained in this press release is correct at the time of going to press.