Christopher Bates discusses the impact of the Olympic Games on the UK economy and where we go from here.
This summer's Olympic Games appear to have given the UK more than just gold medals to cheer about. The 1% rise in gross domestic product in the third quarter of this year exceeded expectations and helped lift the UK economy out of a technical recession - providing welcome relief for both the Government and the Bank of England. However, since most of the gain in output was attributable to temporary factors, it is still too early to know whether this marks the start of a decisive uptick in growth.
Employment v productivity
The Olympic Games boosted services, which, in turn, helped to push unemployment claims down to their lowest levels in more than a year. The number of people in employment rose to its highest levels since 1971, when records began. However, the sharp contrast between trends in employment growth and levels of economic output has puzzled economists and policymakers alike.
While employment rises, productivity has remained around 4% below pre-recession levels, limiting the economy's growth potential. Another source of bemusement is that despite the high levels of employment, tax revenues have fallen - a worrying trend for the Treasury, which is already struggling to meet this year's Budget deficit targets.
Where next?
When Chancellor George Osborne outlines the Office for Budget Responsibility forecasts in the Autumn Statement in December, he is likely to claim that public finances are in line with his 'plan A', although tough decisions will need to be made if tax revenues continue to decline. The question for the Monetary Policy Committee (MPC) is what to do next.
Minutes from the most recent MPC meeting show that the focus for discussion has shifted to whether further quantitative easing in its current form will help. Although inflation has fallen steadily and now lies just above the Bank of England's 2% target level, recently announced energy price increases will moderate the impact on disposable incomes.
Funding for Lending Scheme
Early reports suggest that the Funding for Lending Scheme, which was launched in June, is beginning to yield positive results in the mortgage market. In fact, both the Government and the Bank of England are pinning a great deal of hope on its success. However, the MPC may be forced to implement even more unconventional policy if it is to reach the wider economy.
UK equities
The UK equity market is highly skewed towards the mining and energy sectors, which have proved vulnerable to the continued global economic slowdown. Investors have been finding better value in companies further down the market-cap scale. Both mid-cap and small-cap shares have comfortably outperformed the FTSE 100 Index over the past three months, benefiting from the momentum gained during the summer.
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