Consumer spending has been the main driver behind the UK economy. Although this has slowed down in r...
Consumer spending has been the main driver behind the UK economy. Although this has slowed down in recent months, managers are waiting to see if this has simply been in reaction to the war in Iraq.
Oil prices have dropped which spells good news for inflation and it is possible another rate cut in the pipeline could increase consumer spending.
However, the manufacturing industry remains in the doldrums. Chancellor Gordon Brown's 2003 Budget has also caused some mixed reactions.
According to Trevor Green, director at Allianz Dresdner, there has been no real news in the UK 2003 Budget that is good for the economy.
Green says: 'Government spending is expected to remain strong and as the government is the major employer in the UK, unemployment should remain at low levels.'
However, Simon Rubinsohn, chief economist at Gerrard, thinks the growth estimate announced in the 2003 Budget was a little high at 3%-3.5%, and only forecasts 1.8%.
He doubts the ability of household spending to increase by a further 2.7%-3%. He warns the risks are skewed towards the downside.
For consumers, Green thinks it will depend what happens to the housing market. He expects housing prices to remain stable and volumes to remain strong, interest rates are low and mortgages are offering consumers good deals.
Although there was a fall in consumer confidence in February and March, Green is interested to see what will happen now that the fear surrounding the war with Iraq has subsided.
Green is not concerned that the economy is slowing believing this to be a temporary reaction to the Iraqi conflict.
John Hatherly, director of global analysis at M&G, adds: 'Domestic economy is determined by the strength of consumer spending. The main driver of GDP is consumer spending and our forecasts this year is about 2%. Unemployment has been low, wages have been going up and the value of houses has appreciated.
'The housing market has had a wealth effect on the economy. It has enabled consumers to borrow a significant amount of money to spend in the economy and has sustained growth. This has recently come under pressure due to the war with Iraq and because retail figures have been weaker and taxes are going up.'
Although housing prices in the North are still rising, Hatherly warns the market has slowed down in London and the question is whether it will fall gradually, or crash. The buy-to-let market has weakened and returns are falling off. If prices do drop, it could have a negative effect for consumers.
In the corporate sector, investment spending still remains tough, thinks Green.
Companies are reluctant to spend money as they are already using existing stocks and capacity and do not need extra.
Green says on the industrial side the key thing is the oil price. The good news is that oil prices have dropped by about one third. This is expected to keep costs lower for the industrial sector.
According to Hatherly, oil price increases have been negative for the UK economy as they have pushed up inflation, and the fall has taken some of the pressure off.
However, Hatherly also thinks the inflation data might have been distorted because of the war. He warns if inflation continues to increase and consumer spending does not improve there could be another interest rate cut.
Rubinsohn thinks there is a reasonable possibility that base rates will be cut over the coming months, will remain at around 3.5% this year, and any increase in the next year will be relatively modest at 3.75% to 4%. On the manufacturing side things are still not picking up, however.
Green says: 'The manufacturing industry has seen a long-term sector decline. A lot of production has been moved overseas because it is cheaper and a large number of manufacturers are using the UK only as a research base.'
In the 2003 Budget it was anticipated a rise in export volumes by 8%-8.5%. Rubinsohn warns that this forecast is asking a lot unless there is a further depreciation in the pound to accompany global recovery.
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