The UK economy [November 2004]

There remains strong growth in the US, Japan and the Far East despite a significant slowing in China and weaker data from the US. Japan is performing better than expected while the Euro Area is still relatively weak. The Euro Area is however, forecast to pick up in 2005. Inflationary pressures are continuing to build in the world economy principally because of capacity constraints and higher oil prices. The monetary authorities are taking what they believe is the most appropriate response to inflation in the sphere of influence. The Federal Reserve has indicated interest rates will rise further and the ECB are holding interest rates as are the Bank of Japan. The main downside risks are the imbalances in the world economy and the prospect of sustained higher oil prices. Overall the conditions in the world economy remain favourable. UK real GDP growth was only 0.4 per cent in 2004Q3 after growth of 0.7 per cent and 0.9 per cent in the first and second quarters respectfully. This may mean that the upper limit of the Chancellor's forecast of 3.5 per cent for real GDP growth may be unobtainable now. It may be however, that GDP growth of 3.3 per cent could still be achieved in the UK, if this is a temporary phenomenon rather than a sustained slowing of growth. Investment is a more important driver of growth now and both consumption and government spending contribute significantly to domestic demand. There will be a more substantial pick up in trade when the Euro Area recovers more fully. Inflation remains relatively low in the UK economy with CPI inflation of only 1.1 per cent in the 12 months to September. We are still concerned about the current account deficit and PSNB. We will remain at relatively low levels. The outlook for the UK economy is still relatively promising.