In the latest issue of the Deloitte Economic Review, our Economic Adviser, Roger Bootle, looks at the recent performance of the UK economy and asks whether there has been a fundamental transformation. His main points are as follows:

• There is no doubt that the UK economy has enjoyed an impressively long period of uninterrupted expansion – 50 consecutive quarters and counting. But this may not be as remarkable as it sounds.
• In annual terms, the UK economy expanded consistently from 1947 to 1973 – over twice as long as the latest stint. Furthermore, the average growth rate of 2.8% since 1997 is not particularly strong. Indeed, growth averaged 3.3% in the 1960s and even managed 2.4% in the supposedly disastrous 1970s.
• On top of this, although the economy has performed well in comparison to many other countries, it is easy to overstate its relative strength. The UK has outpaced most members of the euro-zone and Japan, but lagged behind much of Asia, Australia, Canada and the US. That said, since 1997 the UK’s GDP growth been the most stable out of the G7 nations and growth of GDP per capita has been higher in the UK than in the rest of the G7 except Canada.
• What’s more, this has occurred against a background of pretty difficult global economic conditions which in some previous periods may have caused the UK economy to fall into recession.
• A key factor behind the economy’s recent performance has been the stability and low level of inflation and interest rates. This has owed much to the establishment of the Bank of England’s Monetary Policy Committee. But the key break with the past, and the beginning of major institutional changes, came after sterling exited the Exchange Rate Mechanism back in 1992. In any case, the move to lower inflation and lower interest rates has been a global trend.
• But behind the strong growth numbers lurk four areas of vulnerability, which could yet bring about rather weaker performance in the years ahead, namely the over-valuation of the housing market, the external deficit, the state of the public finances and the disappointing performance of productivity.

Elsewhere in the Review the main points are:

• The housing market slowdown seen so far has already prompted consumers to tighten their belts. When house prices start to fall on a sustained basis, as we think they will, the consumer slowdown may intensify. We expect consumer spending to rise by just 1.5% both this year and next. Moreover, a further hit will come from higher taxation – to the tune of £10bn per annum – as the public finances are put on a more sustainable footing next year.
• The rest of the world is unlikely to offer much of a lifeline. The unwinding of the large imbalances within the US economy and a continuation of the euro-zone’s poor economic track record will contribute to a slowdown in world growth from the robust rates seen in recent years. This is in spite of a boost from a lower oil price and the weakening in the dollar to $1.50 against the euro by the end of the year.
• Accordingly, the UK’s external sectors will not fully compensate for the consumer spending slowdown and UK GDP growth is set to fall from 3.2% last year to just 2.0% this year before a modest pick-up to 2.2% in 2006.
• But with inflation likely to remain well contained, the Monetary Policy Committee will be in a good position to respond by lowering interest rates. Interest rates could be falling by the end of this year and could easily end next year as low as 3.5%.

Ends

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