The Economy Will Be the Deciding Factor Again

A year is a long time in economics. As 2013 dawned, many were expecting the worst since the financial crisis of 2008 the UK had suffered two recessions and a third was apparently just around the corner, ready to take the country into unchartered territory – the triple dip. Yet the picture began to brighten instead. Growth returned in the first quarter and GDP growth forecasts for 2014 begin to creep higher. None of this is to say the financial crisis can be finally consigned to the dustbin of history. Prime Minister David Cameron is aware of this and also knows the clock is ticking towards 2015’s general election. All of the major parties are gearing up for the hustings, where the economy is likely to be the biggest issues.

“It’s the economy stupid”, was one of the messages Bill Clinton’s campaign manager James Carville prepped his staff to focus on ahead of 1992’ss US presidential elections,. Thus tense summary is all the more apposite for the Coalition. The economy is the key battleground for those jockeying for power in Westminster and this is an area where the government may finally be enjoying some success. Fears of a triple-dip proved unfounded and the International Monetary Fund’s estimate is for 1.9% GDP growth in 2014.

If jump starting the economy is top priority for those working in Downing Street, then reducing the nation’s huge liabilities comes a close second. The UK’s national debt stood at some £1.2 trillion is September 2013, or 74.6% of GDP. The liabilities will grow during 2014 as the government delays the start of its reduction plan by three years until 2017 when its debt will have reached some £1.6 trillion. This is where the Bank of England comes in. As Cameron and Chancellor George Osborne look to squeeze harder on the fiscal side, the central bank is likely to keep monetary policy very accommodative. It has held interest rates at the historic low of 0.5% since March 2009 and one of new governor Mark Carney’s first actions was to announce in August they would remain at this level for another three years unless employment suddenly zoomed below the 7% mark.

August’s announcement was made as part of Carney’s policy of giving so-called “forward guidance”. Advocates argued the new policy created more certainty for businesses sand individuals, to encourage borrowing and therefore investment. Sceptics dismissed it as mere jawboning and evidence the Bank run out of policy tools after four years of zero interest rates and £375 billion of Quantitative Easing had generated the soggiest recovery in living memory. The data offer succour to both camps. The number of people in work in the UK has never been so high at some 30 million, yet an unemployment rate of 7.7% is uncomfortable and it appears many of the jobs created are part-time in nature.

Another hot issue for the Government in 2014 will be house prices. The market is recovering, largely driven by government initiative such as funding for lending and Help to Buy. House prices have responded and in the autumn, mortgage approvals reached their highest level since December 2009 as lenders stamped more than 38,000 loans, some 25% higher than in the same month a year earlier, according to the British Bankers Association.

Ultimately, when it comes to the elections, the technical aspects of economics will make no difference to the public. What will count, however, are factors such as the standard of living, prices, and wages. The Conservatives will be hoping that their economic plan and initiatives on house prices will help the citizens with the overall price of living. This will be the decider as to which party leads the UK after 2015.

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Categories: Global Political Insight

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