"With employment rising and house prices continuing to push higher, it is likely that consumer confidence will continue to strengthen. The main concern in the near term is higher utility bills, which could squeeze household finances."
- James Knightley, economist at ING Bank
More good news on the Britain's economy emerged last week, as the number of people seeking for jobless benefits fell to the lowest since 1997, while retail sales rebound sharply. With improving domestic situation, Britain's government can allow themselves a small sigh of relief. The U.K. economy is likely to expand about 2% this year; however, latest figures are pointing to a 3% plus surge in output over the next year. The improvement is mostly led by record-low interest rates and constantly rising housing prices; however, according to analysts this is the opposite to the current needs of the economy. The rebound is led by stronger demand, rather than improvements in supply and the economy is not switching to vital aspects, like exports and investment, in order to achieve a long-term prosperity. For evidence there are high risks for the recovery, there are two important fundamental data. One of them is current account deficit, which is designed to measure the difference between what the country earns abroad and what it spends. In Britain's case, this indicator has not moved into positive territory for 30 years. Another gauge of economic ill-health is gross fixed capital formation, which represents a share of how much is being invested rather than consumed as a part of GDP. Currently, this indicator stands at just 14% of GDP- the lowest in the OECD. All the above-mentioned problems are just the other side of the same coin, however, government's ability to increase exports and lure more investments may be vital to achieve a long-term amelioration.
© Dukascopy Bank SA