Don't Get Your Hopes Up Over The Recovery Yet, OECD Warns
One of the most respected and influential global financial institutions: The Organisation for Economic Cooperation and Development (OECD) has recently readjusted it's GDP forecast for Britain to 1.5% increase by the end of 2011, down from 1.7%.
They said that the UK will increase in growth by around 2%, which is almost half of that predicted for other strong countries in the European Union. This shows just how slowly our economy is recovery in relation to our close countries.
The Government's new organ for preventing deficits and waste, the Office for Budget Responsibility, recently forecast higher growth at 2.1 per cent, a figure that seems more than a little optimistic compared to the ominous outlook that the OECD has offered.
A recent OECD report stated the recovery began in earnest during 2009 and will only now face choppy waters in 2011, but this can be "Mitigated by monetary policy remaining supportive." Monetary policy translated from financial speak means interest rates, so the Bank of England can use the money supply to help steer the economy to higher ground, something which Euro country's cannot do as they surrendered their monetary sovereignty.
The watchword in the OECD report however is 'supportive', the OECD's veiled advice to the Bank of England and Treasury would be to keep interest rates low for as long as is possible, thus keeping the cost of borrowing down. The OECD's belief is that this will allow businesses, particularly SME's and individual consumers to have enough cash flow to lift the economy up out of the recession.
As things stand, the Bank of England have confirmed that there will be no immediate increases in the base interest rate, however it has also been said that increases will occur later in 2011, possible in the final quarter of the year.
The sky rocketing cost of global commodities that has dominated the economic environment in the last couple of years, has been caused for the in general by pressure from the expanding economy of China. This has impacted on prices in the UK at every level.
A monetarist approach to combating inflation involves restricting the supply of money in the economy. The argument goes that if you slow down spending, then you will reduce inflation. Whilst this may result in some short-term pain for the economy, the idea is that this approach will avert more significant problems in the future.
There is a problem with this argument, however. The economic pain of inflation isn't being caused by too much spending and an overheating economy, it's got an entirely different cause. This is a problem that the Bank of England has very little ability to control, and attempts to remedy using interest rates to dampen demand will do nothing more than create unemployment.
The end result being, a recovery in the UK will recover, but the recovery will be weak and not as strong as hoped by the government or the Bank of England until commodity prices calm down, that will go a long way to controlling inflation.
About the Author
Timothy Frodsham writes for http://JustCommercialMortgages.com the UK's No.1 site for the latest commercial mortgage rates and commercial property finance news.
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