As regional sponsors of the Institute of Directors, I make a point of regularly attending the IOD’s Networking Lunch.

This month the subject was Economic Predictions, delivered by Graeme Leach IOD Chief Economist and Director of Policy.

The lunch itself was preceded by a workshop with a smaller audience, intended to offer a more personal approach to the subject. I thought the discussion may be useful for Absolute’s contacts.

There are five key factors that have determined the current state of the UK economy:

1. Real / relative incomes are falling resulting in consumer spending being suppressed
2. The savings ratio is lower than in the 1980’s and 1990’s because of the fall in real income, high inflationary pressure and lack of taxation stimulus
3. Interest rates are unlikely to fall in the short term – this makes our mortgages more affordable but means that customer confidence of a recovery is not present because we don’t have more money in our pockets to spend
4. The Governments Spending Revue or fiscal squeeze. Clearly this will restrict growth, but if it were not present the UK would pay a price in the markets – they need confidence and stability
5. Monetary Policy – the money supply growth is marginal, or flat. Quantitative easing was intended to create a 6 to 9% growth in the money supply, but this has not happened.#

The result is weak growth for this year and the next. The underlying growth trend is low (0.2%) because of the previous Government’s policy on taxation and business regulation BUT, this is in the wake of a huge financial crisis. Factors such as adverse weather, Japan’s tsunami and the Royal Wedding have also impacted output. Added to this, the banking system is damaged and so this limits growth. The banks cannot rebuild their balance sheets and help recovery.

We will not see growth levels like 2003 to 2007, so businesses need to manage in a low growth scenario.

We are seeing a readjustment in living standards, which has been increasing for the past 40 years. Increased petrol, mortgages, etc will be painful over the long term.

The key to the outlook is the US; its financial policy means that it should see growth by the end of 2012 and a resulting increase in dollar values. Asian currencies will appreciate against the dollar because they are also experiencing growth. Sterling may therefore lose value and low value Sterling helps exports to the Eurozone and boots the domestic tourist trade.

The public sector will be replaced by the private sector; this year there have been four times as many jobs created in the private sector compared to jobs lost in the public sector.