The silly season of August 2000 has seen a silly climate of snow in Yorkshire and a tornado over the Humber. Fortunately the economic climate has proved more settled and predictable.
The Bank of England held interest rates for the seventh consecutive month despite fears that they might be raised. Increases in manufacturing output and a reduction in the rate of house price increases both helped to reduce inflationary pressures in the economy.
But the picture of a rosy economy hides several thistles. GDP is growing at a good but healthy rate in line with predictions (itself rather a novelty). However the growith is not balanced, with the domestic economy and service sectors prospering at the expense of manufacturing.
The continuing relative high value of sterling is leading to more external sourcing of components from overseas. This in turn is leading to reduced investment in UK based suppliers. Today’s sunshine may be bought at the expense of clouds tomorrow. Because of the imbalance, the blunt instrument of interest rates can only help some sectors and damage others whatever the Bank of England decides.
In the US, there are signs that the longest ever prosperity boom could be ending. This is due to economic factors rather than the forthcoming political elections.
US GDP figures for the second quarter were much higher than expected. This is significant for two reasons. First, it undermines the reliability of economic forecasting, which in itself is sufficient to cause markets to jitter. Second, it goes against the hoped for moderation of economic growth, which is in danger of becoming unsustainable.
If, as hoped, the US economy eases with a slight fall-back in the value of the US dollar, this will benefit the UK economy. It maintains a stable economic environment and will allow a slight but needed appreciation of sterling against the dollar. Most of the much-trumpeted strength of sterling is in comparison with European currencies, not the dollar or the yen.
The alternative is for the US economy to continue its surge forward of unsustainable growth. This could force the Federal Reserve to intervene. Politically, it is unlikely to want to do this before the presidential elections in November when economic policy for the next four years becomes clearer. By this time, the problem could require radical action. The message is to wait and see, and in the meantime enjoy the sunshine.
[2000]