Markets rally despite warnings
George Osborne’s November statement on Tuesday raised a few key concerns with regard to the UK economy, but none came as a surprise to markets. The GDP growth forecasts have been revised down to 0,9% for 2011 and 0.7% for 2012 (from 1.7% and 2.5% respectively). Future growth forecasts from the Office for Budget Responsibility (OBR) are 2.1% for 2013, 2.7% in 2015 and 3% in both 2015 and 2016. The Chancellor also said that the government will miss its deficit reduction target, with the structural deficit of £53 billion in 2015/16, compared to the original estimate of £6 billion. Debt is likely to peak at 78% of GDP in 2014/15. These were the headline figures – the rest of the budget statement was concerned with tax, welfare and “hard decisions” on public sector pay, again with few surprises.
The UK Chancellor has also said that the UK’s economic situation will get “very much worse” if the eurozone crisis ends badly. He urged Europe to take “decisive action”, but shadow chancellor Ed Balls has criticised Mr Osborne for cutting spending so deeply and so quickly. “If there’s a hurricane brewing, you don’t rip out the foundations of your house,” he said. Mr Osborne responded, “In a way, what’s happening in the eurozone is a reminder to Britain that if you don’t face up to your problems, you have very much worse problems. Britain has taken decisive action; we now need the eurozone to do the same.”
In the financial markets, European markets have opened flat today after strong gains on Wednesday following a plan by some of the world’s central banks to boost lending. The rise was despite warnings from Mario Draghi, the new head of the ECB, that “downside risks” to the eurozone economic outlook had increased.
On Wednesday, the US Federal Reserve, the European Central Bank, and the central banks of the UK, Canada, Japan and Switzerland said they would take joint action to ease tensions in the global financial system from 5 December. Based around a transaction called dollar swaps, the plan cuts the cost of borrowing the US currency by half a percentage point. As well as cheaper US dollars, the central banks will also provide easier access for lenders to other major currencies as and when they need it. These measures should, according to policymakers, trickle down and make it easier for businesses and households to get access to finance.
Photo credit: See Li