The hour of reckoning

The UK economy is steeling itself against a predicted market downturn this year but those in the know feel it's strong enough to weather the global recession.

Along with other parts of the world, the United Kingdom's economy is also being threatened by the global economic meltdown. Finance minister Chancellor Alistair Darling has, in his first budget, slashed growth forecasts to an extremely modest 1.75 per cent to 2.25 per cent this year, a 0.25 per cent decline from his previous estimate. To add to the discomfort, inflation is also expected to go up in the short term.

Chancellor Darling, defended the economic growth targets saying they were "realistic" and added that the UK economy was well prepared to cope with the global downturn. "Our economy remains fundamentally strong," he said. "I am very conscious of the fact that we are going through a period of considerable uncertainty, particularly in the financial markets. I think that the forecasts we have set out are reasonable and we have taken account of the uncertainty."

Chancellor Darling believes that Britain's "flexible" labour and product market laws can absorb the impact of the turmoil in financial markets without curbing economic output.

"The UK economy has proved more resilient than any of the major advanced nations, to the shocks of the past decade. I believe we will get through this turbulence," he said.

The government is expected to raise taxes and borrow an additional £20 billion (about Dh144.5 billion) in the next four fiscal years.

The Treasury estimates the deficit will total £140 billion (about Dh1.01) through March 2012. "The chaos in global financial markets, which started with the collapse of the American mortgage market, has affected all economies from the US to Asia and Europe, including England."

Darling's critics are skeptical about his contingencies and forecasts. "He is right to point out that markets are flexible in the UK and that we handled the 2001 slowdown better than anyone else," points out Danny Gabay, director of Fathom Financial Consulting in London. "That won't help in the next 24 months." Michael Saunders of Citigroup also feels that the growth projection this year will be a poor 1.4 per cent, and even lower growth is expected next year.

He believes that most sectors will eventually feel the pain of the credit-induced slowdown.

Prime Minister Gordon Brown agrees that rough times are ahead for the global economy but insists that the British economy will weather the storm. "We enter this latest period of uncertainty more stable and more resilient than at any other time in our history," he wrote in The Sun newspaper. "When a major bank in America has to be rescued over the weekend and billions are wiped off share markets across the world, I understand that people are worried about the future. We have taken tough decisions which will see us through."

According to a survey published by the Confederation of British Industry (CBI) the UK's economy will trudge slower during the next two years than forecast due to troubles in the credit markets, rising commodity prices and weak demand, both at home and abroad.

In addition to a sluggish 2008, the CBI has pegged economic growth in 2009 at 1.7 per cent. The organisation has warned that the tightest squeeze will be on household spending hit by rising food and energy costs. Despite this, CBI director-general Richard Lambert insisted that the picture was not so dismal. "Outside the financial and property sectors the overall mood of business is not as gloomy as you might guess from reading today's headlines. While there are signs of a high street slowdown and some firms say it's getting harder to raise bank finance, around the country many still report quite positive conditions."

The British Chambers of Commerce (BCC) says that the UK must learn from the United States if its small businesses are to survive the "unavoidable" economic slowdown. Commenting on the global financial crisis, David Kern, economic adviser to the BCC, praised the US for acting forcefully by slashing interest rates and introducing methods to counter growth threats. "Our personal debt ratios are very high; the UK economy is vulnerable to a downturn in the financial sector; UK house prices are stretched; our current account deficit is very high and the sterling could face sharp speculative attacks," he said. He called for both the Treasury and the Bank of England to act quickly and make the threat to business growth its priority. "British business has so far been remarkably resilient in the face of the financial crisis. While a UK slowdown is unavoidable, a UK recession can be avoided."

The economic meltdown is hurting the UK residential property sector. According to property portal Rightmove, the UK could see a price crash of up to 50 per cent in the coming 12-18 months unless drastic steps are taken. "We seem to be at the beginning of a falling market" says Nimesh Patel from Bloomberg property. According to The Deloitte Economic Review the housing market would be at the heart of the downturn with prices falling by about 5 per cent in 2008. The global credit squeeze, it added, would make borrowing more difficult. It also pointed out that while the European economy, the UK's biggest export market, will remain relatively strong, it will not be enough to offset a US slowdown. Deloitte expects the UK economy to grow by 2 per cent in 2008 and by a slightly smaller margin in 2009. It may be pertinent to point out here that the UK economy grew by 3.1 per cent in 2007, its fastest rate in three years. The latest World Investment Report produced by the UN Council on Trade and Development reported that last year Britain attracted $1.135 trillion in foreign direct investment stocks, which was more than double Germany's $502 billion, and almost double the combined totals for China ($292 billion), Brazil ($221 billion) and Russia ($197 billion). But, evidently, the situation is different now and the slowing down of the economy has to be dealt with.

To add to the woes, reports indicate that ill-health has also cost the British economy over £100 billion a year which is more than the entire annual budget of the state-run National Health Service (NHS). Carol Black, national director for health and work, added that the annual economic cost of sickness absence is equivalent to the entire gross domestic product of Portugal. "Taken together, the evidence provides a clear and compelling case. In short, we cannot go on as we are," she said sternly. "I hope this review will lay the foundations for urgent and comprehensive reform."

A silver lining in the cloud is the UK manufacturing technologies sector which is forecasting a strong growth of 10 per cent in machine tool sales in 2008. The Manufacturing Technologies Association (MTA) believes that the UK economy will be kept buoyant by the strong performance of engineering. The MTA surveys also reflect positive trends in the engineering sector in the UK and Europe.

All is not lost. The leisure companies are also happily bullish. According to John Waterworth, chief executive of Parkdean, the holiday company, the outlook for business was "fairly solid" with holiday sales ahead of last year and caravan sales similar to 2007 levels. Graham Turner, chief executive of Tragus, the restaurant company with chains such as Cafe Rouge and Strada, is also optimistic of sustained sales. TUi, the tour operator, also affirmed that sales were ahead nine per cent compared with last year. Nick Candy of luxury development team Candy & Candy added that sales of luxury apartments were still strong in 2008.

While an economic slowdown hits all sections of society, the large immigrant population in a multicultural society is badly hit. Thankfully the situation in the UK isn't so bad. A study by the Centre for Economics and Business Research indicates that migrant workers in Wales will contribute £600 million (about Dh4.4 billion) to the UK economy by 2012. Wales' 43,000 skilled migrant workers are expected to account for 5 per cent of the UK's total skilled migrant population and contribute 0.7 per cent of the total £77 billion (about Dh565.16 billion) contribution made to the UK economy. The research revealed that highly-skilled migrants hold and support more than a million UK jobs, a figure which is set to touch 1.5 million by 2012.

According to Lloyds TSB Scotland, the Scottish economy is continuing to grow. Lloyds says it expects growth in 2008 to be near Scotland's long-term growth rate for the last 10 years.
According to the Lloyds survey, 36 per cent of firms reported an increase in turnover, while 28 per cent pointed to a decrease. The net balance of 8 per cent is down from the previous quarter and less than a third that of a year earlier. Professor Donald MacRae, chief economist of Lloyds TSB Scotland, notes that consumer confidence in Scotland has remained robust despite the setbacks all round.The global economic slowdown is hardening and the UK is bracing itself for it.