Questions of balance in the UK economy

Stimulus package

Niesr’s UK economic outlook argues that fiscal policy could be used to stimulate demand in the economy. Moreover, NIESR argues the UK could achieve this with little to no loss of credibility with regard to its fiscal plans.

The report states: “We have never and do not now advocate scaling back the government’s medium-to-longer term policy of fiscal consolidation. However, the UK also suffers from a lack of demand in the short term.

“As we noted in our January review, a 1 per cent of GDP increase in government investment this year would boost GDP by roughly 0.7 per cent, assuming no reaction by the Monetary Policy Committee (MPC). A temporary boost to net investment, which has been cut extremely sharply, would have no direct effect on the government’s primary fiscal target of balancing the cyclically adjusted current budget in 2016-17.”

The MPC is particularly unlikely to act to curb inflation as price rises are likely to remain limited when volatile factors such as energy are excluded. According to the Confederation of British Industry (CBI), while inflation is expected to be somewhat higher than previously thought throughout 2012, in part due to recent oil price rises, it should continue on a downward trend and come close to hitting the Bank of England’s target in the spring of 2013.

In addition, the CBI claims that household spending will remain subdued, with weak wages growth and unemployment rising to a peak of 2.86m in the first quarter of 2013. However, it predicts prospects should improve next year as inflation continues to fall further and disposable incomes begin to recover.

Partly as a result, interest rates are expected to remain unchanged throughout most of the forecast period, with a rise expected in the final quarter of 2013.

John Cridland, CBI director general, says: “The global economy continues to pose a number of significant challenges. Concerns over eurozone stability are on the rise again, oil prices remain high and confidence among businesses and households are still fragile.

“We have always said that the path back to sustainable economic growth will be a long and difficult one, with many bumps along the way. To rebalance our economy towards exports and investment will take time and patience.”

Jenny Lowe is features editor at Investment Adviser