Ongoing economic shocks show UK cannot stand alone

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Quick blog today outlining some concerns about UK inflation which it has been reported today by the @ONS has gone back to 0 in August.  This is down from the 0.1% in June, which came off the back of negative inflation starting in April – the 1st time the UK had been in negative inflation in 55 years.

The reasons for inflation are being put down to cheaper petrol prices – motor fuels falling by12.9% in the year to august and a subdued retail sector – food prices fell by 2.8% in the year to August. What’s concerning here, though is the UK’s inability to withstand international shocks as commentators are rightly pointing out that the UK economy is growing solidly. It points strongly to the fact that in an ever more unified financial market, the UK has less and less ability to stand alone and not be affected.

The most obvious international shock at the moment is the economic slowdown affecting China. China’s investment and factory output for August is below forecasts. Factory output grew by 6.1% from the year before August- below forecasts of 6.4%. Growth in fixed-asset investment – largely property – also slowed to 10.9% for the year-to-date, a 15-year low. This is on top of the billions of pounds wiped off of shares from China’s recent market slump and five cuts to interest rates already in China since November, in an attempt to spur economic lending and activity.

International economic shocks like this are important as they impact the UK’s ability to set its economic path and plan. Analysts are now predicting that interest rates, which the Bank of England have wanted to raise for some time, will now be put back to later 2016.

These global shocks also highlight the ongoing inability of the UK to rebalance its economy. Our recovery is still far too dependent on sectors such as finance and services, with areas the UK needs to expand such as manufacturing and construction lagging behind. For example, Even before China’s downturn manufacturing was down in May with CIPS/Markit reporting that factory orders were far weaker than predicted. EEF the manufacturing trade body has also recently halved its recent full year growth prediction to 0.7 per cent.

Economic shocks such as China are hard to predict or influence. But, in the European Referendum vote, the UK may be walking towards another economic shock, this time of our own making. The vote, which if negative, could move us out of the EU Single market (essentially a free trade area without a barrier) would have massive negative repercussions to our economy and trade – as we get hit by this barrier.

Numerous arguments have been made for UK’s EU membership from the likes of the CBI and others (here is a good one from Economist David Blanchflower). So I am not going to go into detail on this here. But the current external global shock from China’s slowdown, must remind us of the continuing difficulty of standing alone in today’s interlinked global economy. If ever the UK was an island in economic, rather than physical terms, we are no longer. An important lesson for us all here ahead of next year’s Europe vote.

 

 

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About the Author

About the Author: Crispin Oyen-Williams is the Director and Founder of Business Innovate. .

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