Over the past year the UK economy has had to adjust to five interest rate increases, with the August 2006 rate of 4.75% edging up to 5.75% by July 2007. The Bank of England cites elevated pricing pressures as the prime reason for raising rates. This follows a March 2007 inflation rate of 3.1%, which exceeded the Government’s 3% cap. Gas and electricity price hikes during the early part of 2006 were a key factor pushing rates beyond the cap. The 12-month cycle of reporting led to inflation falling to 2.8% in April and 2.5% in May.
Following Northern Rock’s difficulties, outcomes remain uncertain but some analysts anticipate the threat of inflation will cause the Bank to raise interest rates further. Others are urging the Bank to refrain from increasing rates as past rises have not fully worked their way through the system. Both views are reasonable given the fact that the economy remains robust. Bank projections and commentators suggest GDP growth will top out at around 2.8% in 2007 before slowing to 2.2% during 2008. The Treasury estimates that the long term sustainable growth rate of the UK economy is about 2.5%. |
Globally, the OECD forecasts annual GDP growth rates of 4.5%. China and India will continue to exceed this rate. In the developed economies, the IMF predict the EU economy is likely to grow by 2.9% in 2007 and 2.7% in 2008. This strong outlook is due to a better-than-anticipated economic performance and a resurgent German economy. The US economy is forecast to grow by 2.2% and the Japanese economy by 2.3% over the same time frame.
A rapidly-growing global economy is creating an increasing demand for oil. When combined with limited supplies and geo-political tensions in the Middle East, this indicates rising prices. Other commodity markets are also being affected by the need to address the causes of climate change. For example, a growth in demand for bio-fuels has led to price increases for feed stocks such as sugar, corn and palm oil.
The UK Economy
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