Policy conflict for the UK economy?

The IMF is forecasting a slowdown in global growth to 3.7% in 2008 and 2009. This is in contrast to recent growth rates of over 5%.

UK growth is expected to fall to 1.6% with the main factors given being:

1. a weakening housing market (housing in the UK is possibly up to 20% overvalued according to the report)
2. contraction of output and jobs in the financial sector
3. slower exports due to weaker growth in Europe and the US

The pound has also fallen to a record low against the euro today following expectations that the base rate will be cut tomorrow. Ordinarily a weaker domestic currency would be expected to boost export growth by increasing the competitiveness of domestically-produced goods both at home and abroad, but with growth slowing in the UK’s two main export markets (the EU and USA) this is possibly less likely to help.

Alistair Darling remains upbeat - but realistically the UK economy is facing a serious correction in upcoming months, although the extent of this is debatable (see Nick Fawcett’s related and recent article here).

Should the base rate be cut this month? Although likely, the extent to which it would increase the willingness and ability of consumers to keep spending (and particularly in the housing sector) is debatable as bank lending rates remain stubbornly high, and lending conditions increasingly tight, despite recent cuts in the base rate. Of greater interest may be the impact of the base rate on the exchange rate, not least because this could lead to imported inflation.

Could a lower base rate actually stoke inflationary pressure? Perhaps a good evaluation question for both AS and A2 macroeconomics lessons this week…..