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UK Quietly Impresses with Strong Economic Performance

April 10, 2014 | About:


Among the world's largest economies, Britain is expected to perform solidly during 2014. Recently, the International Monetary Fund (NYSE:IMF) revised its forecast for the UK's economic performance upwards to 2.9%. The United Kingdom has put in place a series of measures aimed at curbing spending and tightening up its balance of payments. Initially, the IMF was concerned that austerity measures would hamper growth prospects for the island nation.

The UK economy continues to forge ahead, unhindered by the crises enveloping the region. These include the ongoing tensions in the Ukraine vis-à-vis Russia and the US, the plummeting price of copper in international markets as a result of China's defaults, and rampant uncertainty in technology and biotech stocks which started on Wall Street last week and continue to pulverize markets around the world. In the face of all of this geopolitical and economic uncertainty, the UK market has been cruising along – under the radar.

IMF Report on UK Economic Performance

The good news is that consumer spending is up in the United Kingdom, much like it is across the United States, Canada, Germany and other Western economies. On par with the aforementioned factors, inflation is at historically low levels across the Euro zone and the United Kingdom. Combined, these elements bode well for the ongoing prosperity currently being enjoyed in the United Kingdom.

The recently released IMF global report assesses each country on its economic performance with respect to the global economy. The UK currently had relatively high bank loans exposure rates to emerging market economies in 2012 as opposed to the same exposure to emerging economies in 1997. Bank loans comprise 22.5% of the overall exposure with debt making up approximately 10%.

Real Interest Rates Declines in the UK and Globally

When it comes to interest rates on a global scale, there has been a dramatic decline since the 1980s. Nowadays, interest rates are moving into negative territory. Part of the reason for the declining interest rates can be attributed to higher savings rates in developed economies. The increased demand for safe havens such as gold and government securities has also helped to keep interest rates relatively low – especially in the United Kingdom.

The cost of borrowing money – for investment purposes – is minimal for people with a relatively good credit rating. In fact, real interest rates have crept into negative territory as a result of declining yields of maturities. A reversal in interest rates is expected in the short to medium term, as developed economies are now showing signs of robust growth and diminished need for quantitative easing stimulus policies. With the global financial crisis now in our rear-view mirror, economic growth targets are being revised upwards and less restrictive policies are being imposed by central banks.

As savings increase in countries like the United Kingdom, so the relative price of investment options such as stocks declines. Therefore a rebalancing of savings/investment is likely to take place in the not too distant future. The interest rate decline since the 1980s in the UK has moved from approximately 6% in 1983 to 0 in 2012. The expected real returns on equity remain higher by at least one percentage point in the United Kingdom over the United States. The global real interest rates between 2008 and 2013 has been beneath 0.5%, however the global cost of capital has been a fraction under 2%.

Also interesting to point out is that emerging market economies have been saving significantly more (nominal saving to gross domestic product) between 2000 and 2013. This figure had increased from approximately 22.5% in 2000 to over 35% in 2013. By contrast, nominal saving to gross domestic product in advanced economies decreased from 22.5% in 2000 to under 20% in 2013. As the level of investment in advanced economies (as a ratio to GDP) decreased, so too has the real interest rate.

Of the world's most advanced economies, the United Kingdom accounts for 5.5% of the total GDP of advanced economies. By contrast, the entire Euro area comprises 26.4% of GDP. As a total of the world economic GDP, the United Kingdom comprises 2.7%. The UK also exports 5.6% of all goods and services from advanced economies and 3.4% on a global scale. In terms of population, the UK's population comprises 0.9% of the entire world population.

Other IMF Considerations for UK Economic Prospects

There is optimism in the UK as more access to credit has renewed confidence in the economy. Exports remain sub-optimal and business investments have plenty of room for upward movement. There is always the spectre of further economic shocks in emerging market economies hurting the Euro zone. Since economies are inextricably intertwined, the impact could well be felt at home in the UK.

Recovery will continue to proceed at a comfortable rate if capital expenditure is raised while accommodating other broader fiscal objectives. IMF forecasts for the UK have increased month on month since January 2014. Initially set at 1.9% for January, the figure has been revised upward a full percentage point. Robust growth has been seen during the first quarter and more is expected. Between January and February 2014 manufacturing output increased by a full percentage point.

Bank De Binary analysts expect the GBP to remain strong against major world currencies into the foreseeable future. Given the strong fundamentals in the UK economy and the resilience it has shown in the face of geopolitical uncertainty in Eastern Europe, the pound appears to have steadied. On the 10 April 2013 the pound was worth €1.1735, and 1 year later the sterling is trading at €1.2135. Over the same period, the pound was worth $1.5387 and $1.6744 respectively.

About the author:

Orit Nathan Mahalal is Banc De Binary’s Head of Content, an accomplished writer and social media expert. At Banc De Binary, Orit heads a team of copywriters who, under her direction, create content for all aspects of the business, internal and external. Orit’s key role is to ensure that only top quality, superior copy enters the channels and that Banc De Binary stays at the forefront of the binary options industry.

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Lannyscram - 3 years ago    Report SPAM

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