Governor of the Bank Mark Carney’s had a first Monetary Policy Committee (MPC) meeting Thursday.
By Nailah Dossa
LONDON, (The Muslim News): Sterling has fallen sharply after the Bank of England warned that markets were wrong to speculate that it would start raising interest rates soon. The pound has dropped a cent and a half against the dollar to $1.5141. It came as the Bank decided to hold interest rates at 0.5% and kept its quantitative easing programme (QE) unchanged at the new Governor of the Bank Mark Carney’s first Monetary Policy Committee (MPC) meeting Thursday. The unusual statement by the Bank’s MPC comes as the economy starts to show signs of recovery.
In the first quarter the UK economy experienced a dismal growth increase of 0.3% resulting in a narrow miss of a third recession, surprising many economists. The Organisation for Economic Co-operation and Development (OECD) also halved the growth forecasts for 2013 from 1.2% to 0.6%.
The second quarter shows more promise with survey compilers, Markit suggesting the manufacturing sector output rose by around 0.5% and the Office for National Statistics said output in Britain’s service sector grew 0.8 percent in the three months to April, gathering pace from the 0.5 percent expansion in the first quarter, and was up 2 percent on a year earlier.
Enabling the UK economy to gain a competitive edge in the global trade process; increasing export revenues as the export of services grew to a record high in the second quarter according to the British Chambers of Commerce. Translating to a fall in unemployment as data shows that the percentage of people unemployed fell from 8.3% in 2012 to a current 7.8%. Which could lead to higher productivity of workers, inducing an increase in GDP which would then help to facilitate economic growth.
Although there has been a modest increase in growth of both the manufacturing and retail sector of the economy, whether that growth will be sustainable is dubious to economists as trend growth prospects vary from each quarter. Spare capacity in the UK economy could lead to further production of goods and services leading to job creation in the long run but is dependant of aggregate demand that stems from consumers.
Separate data has shown that British consumer morale rose to its highest level in just over two years in June and British house prices have risen at their fastest annual pace in nearly three years. Indicating that that growth is strengthening and unit labour costs fell 0.4% in the first three months of 2013 and were down 0.5% from a year earlier, their first drop since the end of 2010.
However, the slump in growth of many European countries, Britain’s biggest export market accounting for up to 50% of its trade and government austerity at home may continue to curb growth. Additionally, companies that chose to bypass redundancy and cut costs during the recession by slashing wages may want to see productivity improve before increasing their demand for workers.
A combination of low wages and high inflation of 2.7% earlier this year also inflicted the sharpest quarterly drop in household living standard that the UK in over a generation.
Prime Minister, David Cameron, in answer to a question asked in the House of Commons on Wednesday the 3rs of July during Question Time, claimed that the “youth claimant count has fallen by 4% since this time last year.” Data shows that unemployment among 16 to 24 years olds did indeed decline by 43,000 to 950,000 alternatively the number of people out of work for at least a year climbed by 11,000 to 898,000, rounding off to 35.8% of the total unemployed in the UK.
Paul Fisher, an Executive Director of the Bank of England’s Markets division spoke at an event in London last week, saying that he was “not happy with unemployment where it is and not happy about growth being as slow as it is.”
“Growth is going to be slow for a long time,” he said. “The second quarter as it happens looks very good but these things will slip from one quarter to another.”
Many economists are torn about the austerity measures undertaken by the present government and believe that a better path to take would be to inject stimulus into the economy and build up economic growth before paying back the national debt which at the end of 2012 accounted for 90.70% of GDP.
The IMF recently admitted that they ‘failed to realize the damage austerity would do to Greece. The same could be said for Britain in the long run as earlier on this year the IMF’s Managing Director, Christine Lagarde, had called for George Osborne to “rethink austerity measures”. Since then Osborne has committed to spending tens of billions of pounds on big infrastructure products, seeking to shift political focus away from spending cuts – perhaps he has started to lose faith in the austerity measures sanctioned.
Whether the UK is well on its way out of the economic downturn it has faced for the past few years is questionable. The present policies may achieve the government objectives leading to an Edwardian summer state or could drag the economy into a slump, only time will truly tell.