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The Economics Story

Fortnightly insight into the current state of the economy and how it relates to Dorset by Nigel F Jump, Chief Economist of Strategic Economics Ltd (a Dorset Company) and Visiting Professor in Economics at the Universities of Bath and Plymouth.

See: www.strategiceconomics.co.uk

The Bank of England Governor, Mervyn King, gave his regular view of economic prospects this week. Approaching the end of his tenure, he seemed willing to engage in more ‘straight-talking’ about the economy. This time, then, he predicted that a “zig zag” economy would continue with quarters of seeming recovery (q3 2012) followed by quarters of further retrenchment (q4 2012). In essence, Governor King says the economy is moving sideways with, in 2013, real growth expected at a meagre 1% and inflation likely to still be higher than target (CPI 2%). He also emphasised the continuing imbalances between economies on a global scale as a major ‘headwind’ for growth. Essentially, he said it is difficult to achieve the necessary rebalancing of the UK economy in a world where countries with large trade surpluses are resisting change in the balance of international demand and supply. 

The next big speech about the economy will come with the Chancellor’s autumn statement on 5th December. This will be accompanied by the next economic prognosis by the Office of Budget Responsibility (OBR). It will be surprising if the OBR doesn’t lower its expectations for 2012 and 2013. The interesting bit for me, however, will be whether the OBR makes any changes to its long-term view of underlying growth: currently, a modest 2.3% per annum for the UK economy.

Recent survey evidence, such as the Purchasing Managers’ series for October, shows South West output and employment sagging recently. With real incomes under pressure (earnings for many people not keeping pace with costs, such as gas and electricity prices), consumer demand is constrained. With high uncertainty about market conditions at home and abroad, business investment is dampened. With government spending (national and local) in retreat and key export markets in the EU back in recession, all components of aggregate demand are under downward pressure.

It is clear, then, that Dorset businesses and households need to plan on the basis of the period of slow growth continuing well into next year.  Confidence is fragile and any improvement is unlikely to come from some national event or change in mood.  It is going to come from micro aspiration rather than macro development.  The risks are high, but there are also still opportunities for success.  Differentiation is the key:  differentiation of product or service offering high value at fair prices; differentiation of markets ensuring access to a good spread of potential customers; and differentiation of workers adding skills and attitude to bring the productivity gains necessary for recovery.

Professor Nigel Jump, 17th November 2012

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