UK Continues to Weather the Storm

The real UK economy appears to be weathering the storms upsetting the global financial markets – for now.

The IMF has downgraded its outlook for global growth, but it is still predicting Britain’s economy to expand modestly over the next few years.

This is underpinned by strong consumer spending, but there has to be some question as to how Britain will fare if the rest of the world slows down and consumer confidence takes a knock.

The recent turbulence in the Chinese economy has unsettled global markets, though structural changes in an economy of its size and importance were always going to be subject to uncertainty and volatility.

It is important that China continues to rein in a number of excesses which have been allowed to develop over recent years, such as in the equity and property markets, in order to put prospects for growth on a more sustainable path.

However, in the short-term, the IMF’s forecast for the UK of 2.2% growth in 2016 and 2017 could prove pessimistic in light of falling energy prices, which have traditionally put cash into the pockets of consumers and businesses alike, boosting advanced economies.

In the UK, continuing low inflation has removed much of the impetus to raise interest rates, meaning ultra-accommodative monetary policy looks set to continue through 2016.

While any rise in interest rates may well set off an overreaction in volatile financial markets, there are concerns that ultra-low rates will exacerbate capital misallocation over the medium term.