With the annual Financial Times economists survey forecasting that the UK economy would continue to grow in 2015. The prospects for the UK economy was greatly improved by the drop in oil prices to less than $60 per barrel, according to Tony Dolphin from the Institute for Public Policy Research, who has previously stated concerns about the world economy slowing.
However with the Greek crisis and weakness in the eurozone as well as the May General Elections, there are plenty of elements that can impact the economy of the UK.
Dropping Oil Prices – Options for longer term binary trades?
Oil prices had been stable for four years at around $110 per barrel and fell to as low as $48 a barrel at the start of 2015 for the first time since May 2009. This has had wide reaching consequences for countries worldwide, with the Russian economy suffering as well as the Venezuelan economy.
It has been suggested that if Saudi Arabia cut its production levels it could help support the global price of oil. But with a $700bn reserve fund and only needing oil to be $85 per barrel to support its economy, Saudi Arabia seems set on weathering the storm in hope that other large oil producers will have to shut down so that they can possibly pick up a larger market share.
The major benefits to the UK economy are the failing prices in energy prices and fuel prices. A 10% drop in oil prices should lead to a 0.1% increase in economic output. Andrew Oswald of Warwick University said “Energy is at the heart of an economy. The usual lag from oil prices to visible prosperity is one to two years.”
Greece and the eurozone – Forex impact
The eurozone crisis and Greek bailout has placed a lot of pressure on the British economy and caused turmoil in the eurozone. Greece must repay its current loans of €350 million to the IMF and there ability to do so has caused uncertainty.
Eurozone finance ministers met in Brussels and after an extraordinarily short meeting, the president of the eurogroup, Jeroen Dijsselbloem, has said that the Greek government needs to implement reforms if they are to complete the €7.2bn bail-out extension and avoid bankruptcy.
Athens drafted its plan for economic reforms and presented them last Friday, but it has been warned that the measures taken are not enough to satisfy the lenders. With all the uncertainty surrounding Greece and the eurozone, there is little confidence that the loans will be repaid.
Norman Lamont, a former Conservative chancellor appeared on Newsnight on 20th February and said, “The debt will never be repaid,” shortly after Greece and Germany managed to have the bailout deadline extended.
On 24th February, the FTSE 100 was pushed to a recorded high as fears of the Greek bailout had been calmed, pushing past the 6950 point mark that was previously reached on the final day of trading back in December 1999. The FTSE 100 closed at a new recorded high of 6949.63 on the same day.
It was announced earlier today that Athens have been awarded a €550 million lifeline by the Hellenic Financial Stability Fund (HFSF). The head of Europe’s Financial Stability Fund, Klaus Regling, has said that the funds were originally deposited in Greek banks before the country’s bailout in 2010 meaning that the country’s creditors had no legal claim to it.
There is still a lot of uncertainty surrounding Greece’s ability to repay the €1.2 billion that is due shortly; however this injection of funds will help to relieve some of the pressure.
May general elections
With the budget being announced on 18th March, there is grand speculation over whether George Osborne will be handing out what the Guardian has coined “pre-election lollipops.” Originally political rivals seemed content that the chancellor would not have any currency on hand to help sway the minds of undecided voters.
However due to the stability of the UK economy over the last few months and the upturn in the labour market, the effect has finally been felt in tax collection – from tax receipts and other taxes including VAT.
In January the treasury managed to accrue the largest surplus for a single month in the last seven years with £8.8bn compared to the £6.5bn from 2014. As inflation rates have fallen to a 2% low with wages rising for the fourth consecutive month and unemployment dropping to a six year low there are clear signs that they economy has improved for individuals.
On the international market the pound has remained strong against the dollar and euro over the course of the last five years. Though the high point of 58.283p per $1 was on 4th July last year, the pound closed at 0.66496p per $1 on 10th March 2015. Though these are still not as good as the 47.517p per $1 that the pound closed at on 7th November 2007, the exchange rate remaining strong has helped the economic growth of the UK.
With Labour signalling that they would welcome a return to a top tax rate of 50p (from 45p) instead of continuing the austerity measures that the Coalition have implemented on spending for public services and Whitehall departments.
Yet experts are forecasting that if Britain were to have yet another hung parliament, it could well be damaging to the British economy. As far back as October 2014, the prospect of another hung parliament in the May General Election hampered economic growth and business investment predictions according to the EY Item Club’s autumn forecast. This is as not helped by businesses being worried by the prospect of a referendum in Britain over its membership in the European Union.
“The comparative advantage we offer foreign investors is dependent on the fact we are a haven of political stability, and our proximity to Europe. If both of those are brought into question, what happens to the likes of Nissan and Toyota, or financial services firms in the City?” said Peter Spencer, chief economic adviser to the EY Item Club.
Phil Thornton of Clarity Economics has also stated that a weak coalition government after May is “the major risk for 2015”. This will be due to uncertainty and lack of both business and consumer confidence. “If there is a messy coalition that takes days to put together that will add to the uncertainty…Sterling will weaken in those scenarios and the exchange will be volatile. Financial markets will be hit.”
However economist such as Sir Howard Davies, a former member of the Bank of England’s Monetary Policy Committee has said that a “clear majority for either major party would not make a huge difference” to the economy, but has supported the view of other economists that a weak coalition can only hurt it.
Words of Warning
There is little hope that the eurozone economy will experience growth, however George Magnus, adviser at UBS told the Financial Times that “unless there is a big productivity upside surprise, 2015 may be as good as it gets before the UK runs into constraints.”
Levels of unemployment are predicted to drop over the course of 2015 but as the year goes on there will be fewer chances for large scale reductions in the unemployment figures. According to Bart Van Ark, the chief economist of the Conference Board, “the long-term growth trend of the UK will gradually drop to below 2 per cent, about the same as the euro area.”
What may prove to be the key to sustaining the UK economy throughout the political knock on effects will be the return of investment in business and high levels of productivity that have not yet been addressed, according to Danny Gabay of Fathom Consulting.