'The UK has the strongest and best-performing economy in Europe' Discuss.

‘The UK has the strongest and best-performing economy in Europe’ Discuss

When one talks about a strong economy, a few key economic indicators will get mentioned; inflation, unemployment and economic growth. These are considered the three main macroeconomic indicators of any economy. To define a strong economy in the simplest form you must have a low rate of inflation, low unemployment and steady economic growth. During this essay there will be comparisons between other European countries (e.g. France, Germany, Luxemburg, Belgium, Spain, Italy) and these economic indictors mentioned as well as others.

We will start to look at inflation rates. “The British economy has slowed over the past 12 months, but remains among the strongest in the developed world, a report has said” (BBC News Online). Last month the Underlying rate of inflation in the UK remained unchanged at 2.3%, which is below the governments target rate of 2.5%, this is good for the economy. The headline rate of inflation, which includes mortgage interest payments, fell last month by 0.4% to 1.7%. These figures show the rate at which prices are increasing. When we compare the UK’s annual inflation figure of 1.2% to that of Germany and France (-0.6% in October), which is around the 2% mark, it seems that our rate is quite low and therefore good for our economy. The Eurozone inflation is expected to be 2.1%; this is measured by the Monetary Union Index of Consumer Prices (MUICP). By looking at this we can see that this figure is very close to the UK’s inflation rate. On the whole inflation in the UK is at a lower rate than that of its European neighbours, which is an indicator of a strong economy.

When we look at unemployment in the UK we can see that it is around 900,000 or 2.3%. This is the lowest it has been since the 1970’s and is at a lower percentage rate than Japan and the USA. Germany who has recently announced that they have just entered a recession has a very high rate of unemployment at around 8.0% and France, Finland and Spain even higher. The UK, Netherlands and Luxemburg are amongst the lowest unemployment rates in Europe. “Unemployment is up again in France and Germany, in a sign that the eurozone's two biggest economies are still in the grip of a downturn” (BBC News Online). France and Germany have the largest economies in Europe and recent figures show that unemployment increased by 15,000 and 45,000 respectively in October. “The German and French economies have now been shedding jobs for nine and five consecutive months respectively” (BBC News Online). These figures are sure to result in low consumer confidence, a reduction in spending and therefore a dent in economic growth. Germany’s unemployment does normally rise in November due to the suspension of seasonal employment but it seems there is a pattern of rising joblessness. Since the terrorist attacks on September 11th and therefore resulting in global economic slowdown there has been a number of job losses in the UK but this is relative all over Europe. “The government is insisting there are enough vacancies in the system to rule out a return to high unemployment” (BBC News Online). It may be some time before these recent “lay offs” reach the unemployment figures because these people will not be claiming benefits right away; this could be described as Frictional Unemployment. “Because consumer spending is keeping the economy afloat, the impact of unemployment figures could be crucial for the continued growth of the UK economy” (BBC News Online). Although there seems to be some sort of confusion about unemployment in the UK due to recent lay offs of workers, it is obvious that there is no real worry as there is in Germany and France and soon to be released figures should prove this.

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Economic growth is a simpler indicator to look at. It measures National Income. Gordon Brown announced last week in the pre-budget report that there has been ‘solid growth’ in the UK over the last year. “The rest of the world may be feeling the economic pinch in the wake of the US terror attacks, but most UK growth indicators are still persistently positive” (BBC News Online). The UK economy is growing at an annual pace of 2.3%, which is higher than expected at 2.1%. “Although the figures cover a period prior to the recent attacks on the United States, they provide further evidence that the UK is not on the brink of recession” (BBC News Online). Germany, the biggest economy in Europe, growth has been dented severely this year. It was forecasted to be around 2% but recent figures show that it will be around the 0.75% mark, which is very low. The definition of a recession is two consecutive quarters of negative growth and this therefore proves that the German economy is in trouble. France on the other hand has continued to grow at about the same rate as the UK, growing 0.5% and therefore on course for the forecasted 2.0% annual growth rate. “Both France and the UK have both seen their growth figures barely damaged by the after-effects of the 11 September attacks” (BBC News Online). Some economists are saying that the UK and French economy will slow towards the end of the year although household consumption has remained high in both countries compared to Germany. This brings us on to the circular flow of income, a key indicator for the role of the economy and is a framework for understanding macroeconomic changes. Expenditure is a key factor for a growing economy and if this expenditure is higher than the income then the government must borrow from the International Monetary Fund (IMF) and the amount borrowed is called the PSBR, the Public Sector Borrowing Requirement is a monthly, non-seasonally adjusted figure, which measures the size of the government's deficit. At the moment the UK has been borrowing but is expected to be in surplus by 2003. British households are spending more than ever on leisure activities, according to the official annual family spending survey. Families with cars are spending the most and technology (mainly computers) is taking up a large percentage. “After allowing for inflation, this represents an increase of 85% in average spending, compared with 1970” (BBC News Online). This indicates that National Income or GDP per capita is on the increase, which is what the government wants for a strong, and good performing economy.

The UK has run an unexpectedly small balance of payments deficit in the first three months of the year. The UK’s trade deficit is at an all time high around the £8 billion mark. This trade deficit measures the difference between the value of goods Britain imports from abroad and the value of British exports. This trade deficit has been getting worse in recent months, as UK consumers buy more goods made overseas. European countries have not been importing as much due to the high value of the pound and therefore the exchange rate. If this continues then this will force interest rates to rise. Gordon Brown last week announced that manufacturing output is down by 2% this year, which is the main reason for this trade deficit. “The report, which follows official confirmation that UK manufacturing has entered recession, prompted concerns about the contrasting fortunes of service and production sectors. Export prospects for UK manufacturers have deteriorated at their fastest rate for 21 years, the Confederation of British Industry has warned” (BBC News Online). In the coming year only 6% of factories are predicting better export trade after a 59% forecast. “Confederation chiefs called for a cut of half a percentage point cut in interest rates to support UK industry, the first time for three years they have demanded such a big reduction” (BBC News Online). Germany’s exporting trade is larger than the UK’s but like most other European countries does have a trade deficit at present. Luxembourg has a high balance of payments and therefore a surplus whereas Italy and Belgium have large trade deficits and debts.

News just in today (05.12.01) announced that interest rates would remain unchanged at 4%, which is what forecasters predicted. If these rates were raised then it would increase inflation. With the stable housing market and high consumer spending it would not be good for the economy in the long run to change these rates. “Lowering interest rates encourages consumer spending, boosting the economy, but at the risk of higher inflation” (BBC News Online). The UK’s interest rates are 0.5% below the average Eurozone figure of 4.5%, which is good for borrowers. As a global comparison, in the USA interest rates are high at 5.5%. So we can see why the housing market is doing well right now.

Since the Bank of England was granted independence in 1997, it has proved to be effective at conducting Monetary Policy. There decisions on interest rates have been, on the whole, timed correctly. When the government carries out Monetary Policy who also decides on Fiscal Policy, they tend to make decisions, which will boost their popularity in the short term but have no relevance to the long term economic well being. Whereas the Central Bank is a lot more thoughtful when making these economic decisions.

It can therefore be concluded that on the whole UK is indeed a strong performing economy within Europe and most possibly the strongest. This strong performance is reflected by such indicators as solid growth and forecasts for next year predicting an annual growth of 2.75% - 3.75%. Inflation currently at 2.3% is lower than forecasted which is a strong indicator for a strong economy. Our unemployment is at the lowest it has been since the 1970’s and lower than that of the two biggest economies in the world at present at 2.3% or around 900,000. Interest rates are remaining unchanged at 4%, which is low, and the reason for the British economy having a firm housing market. The UK’s main economic problem is the manufacturing output. It could be argued that this sector of the economy is in recession after figures of negative growth in the last two quarters. As a result of this the UK is suffering from an all time high trade deficit, which is also due to the high value of the pound. But overall the UK economy is in a good state taking into advantage the global economic slowdown which is going on around it.

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