Economic Miracle or Mirage, will 2015 be a good one?

The politicians are now in full on electioneering mode, so we can expect no sense from them for the next few months (so we’ll notice the difference?!).  Let’s start with the good news, and yes there seems to be plenty around.

Economic growth is strong in the UK, the fastest of any big industrial country, admittedly that says more about them than it does about us.  Unemployment and inflation are low and profits are rising, whilst, London is booming, our city, Greater Manchester is doing just fine. But yet the government is borrowing too much, wages are growing very slowly, and the Euro zone is still struggling.

So what?  How does all this affect us?

The economy is OK, this is as good as it is likely to get, so we’d better get out there and make the most of it.  But that’s what ‘The Accountancy People’ clients do anyway.

Interest rates remain very low and there seems to be no appetite to increase them by very much very soon.  Why?  Firstly economic growth is OK, but only because interest rates are so very low, racketing up rates would be likely to stamp out the recovery.  Added to this there is still a debt overhang from the property boom that ended in 2008.  There are still lots of landlords that owe much more than the true value of their property, they are OK with interest at less than 1% but would be forced sellers if interest rates were say 5% or more.  The last thing the government wants is large numbers of forced property sales on the market, so they will only increase interest rates, if at all, very slowly and carefully.

It would appear that the government is trying its best to control property price inflation by adjusting the ease with which people can get mortgages.  I believe that they want moderate increases in prices.  Given that they have a great deal of control over the banks (at the macro level) it would be a brave man that forecasts anything other than modest increases in property prices.

The government will borrow an additional £90 to £100 billion this year.  That is a huge sum, a little less than they collect in VAT or National Insurance.  Or to put it another way they could double VAT or NI and get rid of the deficit.  40% VAT?  I think not.  But what this demonstrates is that whoever is elected in May will want to reduce government spending, I would also expect them to tighten the tax system.  How will this affect us? Reducing the deficit will make the economy grow less quickly, at least in the short term.  Many businesses are dependent on public spending, it will be tighter.  There also seems to be a tightening of the tax rules – I’d expect this to continue – we’ll keep our eyes peeled so you are informed if we think a change affects you.

Mirage or miracle?  As a child of the 70s, when it just didn’t work, Britain’s economy looks much more like a miracle to me.  Perfection?  Well, of course not.