was that it

was that it

March 10th, 2010

The British Chambers of Commerce (BCC) has said the recovery in the UK economy is “under threat”. Hang on a second – it’s barely started and already it’s under threat? David Frost, the organisation’s director general, suggested there was “no room for complacency” but, in the circumstances, complacency seems to be the last thing from which anyone is suffering. So how bad does it really look for the UK? The debt problems are obviously severe. The BCC forecasts public sector borrowing will rise to £165bn in 2010/11 before dropping to just the £147bn in 2011/12. Net government debt as a percentage of GDP is now 62%, compared to 58% in the US. The US growth rate is also substantially stronger. Although UK debt is longer-dated, there remain questions over whether the Government will be able to continue to roll over the debt in the longer term. The political situation is weak. A hung parliament looks increasingly likely and, with it, indecision over where to cut public spending. Also, all the public spending cuts in the world won’t help the UK if it can’t revive its growth rate. The 0.3% growth in the final quarter of 2009 is hardly exciting and the withdrawal of the stimulus packages may trigger the dreaded “double-dip” that already seems to be happening in parts of Continental Europe. That is all undoubtedly bad news, but the BCC is still predicting the economy will grow 1% this year and 2.1% next year. Also, it is difficult to see that the UK is materially worse than other developed markets. Admittedly, that’s no great compliment, but 1% for 2010 is also the predicted growth across the eurozone. In 2011, UK growth is predicted to outstrip that of Germany, France and Spain and almost to match that of the US. Although the debt mountain is huge, other countries are facing similar difficulties. Net debt as a percentage of GDP is higher in Germany, France and, of course, Japan, where it is now in excess of 100%. The current account deficit is dangerously weak at more than 2% of GDP, but the US’s is higher. Sterling has already substantially devalued. It is difficult to see how the UK looks significantly weaker than the eurozone, yet the pound remains at historic lows versus the euro. The situation is bad in the UK. There have been policy mistakes, the General Election is an irritating distraction and debt is a constant headache. But we shouldn’t be drawn into thinking that the UK is a busted flush. There is life in the old bulldog yet. for a more in depth view of your investments contact Mark or Clare at GMP Independent Financial Advisers LLP on 0207 2886400

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