Will 2014 be the Year of the Recovery?

Matt Gass looks at the challenges to the economy in 2014

Economy & TaxI can’t point to a single defining moment but at some point in 2013 most seemed to conclude that the long awaited recovery had arrived. This feeling has brought on hopes that, after many false starts and premature reports of green shoots, 2014 will see the recovery we have been working towards since the crash of 2008.

There are many reasons to be optimistic. On growth the reported double dip recession was revised away in June and GDP growth has been strong in the latter half of the year. On jobs unemployment was at 7.4% in December, its lowest level since 2009, and looks set to continue falling. The good news is no longer confined to Britain’s dominant service sector either as reports show a recovery in manufacturing is also on track. Finally in his new year’s message CBI director John Cridland called for employers to raise wages in 2014 to deliver “better pay and more opportunities”, which would be a boon to workers facing a rising cost of living.

However 2013 may just have been the beginning of the end, as there are still many unpredictable factors that could spoil the feel-good atmosphere.

The UK economy is still being kept afloat by vast amounts of money pumped in by quantitative easing and low interest rates. Failing to roll this back risks creating another credit bubble inflated by cheap money, leading many to call for Mark Carney to raise interest rates this year. However even a small rise could push up to 1 million people into perilous debt. This would be devastating for people and families who may have finally thought they were out of the woods. Furthermore, as the recovery has so far been largely driven by domestic spending, there would be a severe knock on effect for the economy as a whole. While the national debt is far from under control in its own right household debt is potentially an even bigger time bomb.

Linked to this is the concern that ‘help to buy’ and ‘funding for lending’ may be creating a new housing bubble. These government programmes were introduced after banks took a frustratingly long time to start lending again after the credit crunch. The programmes have undoubtedly been successful with huge jumps in home purchases and lending to businesses since the programmes started. This has seen a resurgence in house prices though and if more signs appear that a bubble is forming the Government will come under pressure to roll these back which would damage the growth they have encouraged.

Finally trouble seems to be brewing overseas too which, along with a strengthening pound, threatens any chance of the export led recovery David Cameron has been hoping for. The Eurozone is looking as precarious as ever with the Greece continuing to falter and France narrowly avoiding sliding back into recession. There are fears that even Germany may not be immune in 2014.

However emerging economies paint an even more concerning picture. The government has been working hard to sell more to these growing economies through various high publicised trade missions. There are plenty of reasons to believe these markets may not be as solid as optimists hoped as the BRICs (Brail, Russia, India and China) are looking shakier than they have in a long time.

Brazil has stalled and is facing wide scale civil unrest ahead of the World Cup this year and the Olympics in 2016. Russian growth dropped to just 1.2% in the third quarter of 2013 and faces its own unrest highlighted by two suicide bomb attacks just weeks ahead of the Winter Olympics in Sochi. India, often seen as a natural market for Britain, announced it was cancelling a £466 million helicopter deal with manufacturer AgustaWestland putting British jobs at risk.

China remains the largest question mark after sweeping reforms were introduced by new president, Xi Jinping. Despite posting an impressive 7.8% growth 2013 was China’s worst year for 23 years. Analysts suspect that China is reaching the limit of what can be achieved through exports and investment. If China can successfully make this difficult transition it will remain a huge opportunity for British exports. If it falters the whole world economy will suffer hugely as a result.

While the worst seems to be over there is no room for complacency. We are still a long way from normality. Indeed given the extent to which increases in the standard of living under the last Labour Government was driven by increased household debt we may need to seriously reassess what we thought of as normal in the early 2000s. However it is clear that more opportunities are available now than have been in recent memory. If the Government and British business are able to take advantage 2014 could be seen as the year that we finally left the bust behind us.

Matt Gass is Online Editor for Parliament Street


Image from businessrevieweurope.eu

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