Britain's GDP up, but problems remain

Although growth is positive, the UK economy is beset with a slew of problems, including debt, unemployment, and inflation.

By , Guest blogger

  • close
    The Bank of England is seen behind blossoming flowers in the City of London April 23. The economic recovery lost ground in the first three months of this year as the harshest winter in three decades hit retailers and industry. Although GDP is up in the UK, its economy is beset with a number of problems, including debt, inflation, and unemployment.
    View Caption

Britain’s GDP expanded by 0.2 percent in the first quarter of 2010, according to the Office of National Statistics. The manufacturing sector grew by 0.7 percent. Naturally any growth is to be welcomed, and the hope has to be that this is a sign of confidence returning and the wheels of commerce starting to spin.

However, I don’t think we should get ahead of ourselves. Nor should we believe – as the government will no doubt be insisting in the run up to the election – that everything is hunky-dory and that tough decisions can be put off. Growing or not, there are still some serious problems in the UK economy.

First, there’s debt. According to McKinsey the UK has the second highest level of combined public and private debt in the industrialized world, with its 469 percent debt to GDP ratio only just below Japan’s. Government debt, as we all know, is getting worse, as public spending spirals out of control and the state continues to expand. Household finances aren’t much better: the savings ratio has fallen below 5 percent again, which is really no surprise when real interest rates (base rates minus inflation) stand at around -3 percent. This is not the basis for a real, sustainable recovery.

Recommended: Could you pass a US citizenship test?

Then there is inflation: recent figures show CPI at 3.4 percent, RPI at 4.4 percent, and RPIX at 4.8 percent. How much longer can the Bank of England keep interest rates so low without inflation getting out of hand? Of course, if the Bank raises rates, that would have knock-on effects – not least on mortgage lending and, by extension, house prices, which are still unrealistically high by historical standards. And a further drop in house prices (while ultimately necessary) would clearly cause problems for the banks. RBS in particular is still in pretty dire straits, and has no less than £282bn of ‘toxic assets’ in the government’s Asset Protection Scheme. Neither the financial sector or the taxpayer is out of the woods yet.

Unemployment is also a worry. Yes, recent figures showed that dole queues had shortened, but as MoneyWeek’s David Stevenson pointed out at the time: “The number of Brits who are either without a job, or who've given up looking for one, has soared to 28% of the UK workforce. That's a staggering 10.6m people. The total of those who are classified as "economically inactive" has now hit a record high of 8.2m.” In other words, claimant counts are only part of the story. And with public sector job losses virtually inevitable, the worst may be yet to come.

So – on the one hand we’ve got debt, inflation, unemployment and persistent concerns about the housing market and the financial sector, and on the other we’ve got some fairly anaemic GDP growth. That will be Gordon Brown’s legacy, and the cross his successor will have to bear.

P.S. You’ll notice a number of links to MoneyWeek’s website in this blog. For sound economic and financial commentary, I can’t recommend them enough.

Add/view comments on this post.

------------------------------

The Christian Science Monitor has assembled a diverse group of the best economy-related bloggers out there. Our guest bloggers are not employed or directed by the Monitor and the views expressed are the bloggers' own, as is responsibility for the content of their blogs. To contact us about a blogger, click here. To add or view a comment on a guest blog, please go to the blogger's own site by clicking on the link above.

Share this story:

We want to hear, did we miss an angle we should have covered? Should we come back to this topic? Or just give us a rating for this story. We want to hear from you.

Loading...

Loading...

Loading...