The economy

James Sproule

Key issues in the economic outlook include: forecasts and analysis of UK and global economic prospects; the future of the euro crisis and the impact of quantitative easing.

Economic policy

Issues cover the monetary, fiscal and supply-side policies for growth advocated by the IoD. Monetary policy focuses on the IoD's stance with regard to interest rate policy and quantitative easing. Fiscal policy focuses on the IoD's stance with regard to public spending, taxation and deficit reduction. Supply-side policy focuses on the reforms advocated by the IoD in order to boost the competitiveness of the UK economy.

Predictions for 2015

  1. UK wages are set to rise in 2015. The rises are unlikely to be spectacular, generally around 2%-3%, and broadly in line with corporate performance. This means pay rises have the advantage of being in line with productivity and are therefore much more sustainable than rises simply tied to inflation, or worse, above inflation. The only caution here is that if legal rulings over issues such as back dated holiday pay come into effect, the meeting of these claims may well preclude pay rises for the present workforce.

  2. UK interest rates remain at historic lows. UK Monetary Policy will remain ultra-accommodative, at 0.5%, for at least the first half of the year. That such rates remain too low for the long term health of the UK economy is going to be increasingly obvious, (the IoD advocated tightening to start in the summer of 2014) but for 2015 the perceived dangers and uncertainties (not lest the general election) will outweigh the need to dissuade consumers and corporates from again taking on levels of debt which might prove problematic were interest rates to rise even modestly.

  3. UK infrastructure - A change in government raises the possibility of a cancellation of the HS2 line to Birmingham and Manchester. The temptation of an incoming government to accuse their predecessors of profligacy and to spend the money on projects which will be more associated with themselves could well prove irresistible. A definitive decision on a new airport for the South East remains highly fraught and a weak minority government may find it difficult to act.

  4. Euro zone quantitative easing is coming. The European Union is likely to undertake a form of Quantitative Easing for the Euro zone, but it unlikely to have the desired results. Two reasons for this: the scale of QE in the US is $4,488 billion (ie trillion) (25.57% of GDP), and the UK is £374.911 billion (21.09% of GDP), the EU is likely to contemplate a fund of potentially €3 trillion, (22.46% of GDP), so similar in size to the US and UK efforts. However, the Euro zone funds will almost certainly be an amalgam of existing funds being double counted in order to give the impression of size without the actual spending of money. Secondly there is a better than even chance that any QE flows will be directed at politically expedient long term infrastructure projects, where the economic multiplier effects of spending are likely to be muted and the longer term ability of such projects to generate their build costs has to be questioned. Still, in the short term QE is likely to be a mild stimulus.

  5. Europe will avoid deflation, but only technically. Deflation can be triggered by a number of things (some of which are positive, such as technological change which dramatically raises productivity). However the deflation Europe is grappling is the consequence of deteriorating consumer confidence, not a failure of monetary policy. The means that people are not deferring purchases to take advantage of price falls; they are avoiding purchase as they remain very cautious about their future prospects. As Europe is finding, it is very difficult to turn around a moribund consumer, particularly with more of the same politics. The long term danger is that deflation leads to fringe political parties seemingly offering the only way forward, but that is not a problem for 2015 (Greece excepted).

E: James Sproule

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