The UK economy is under threat of collapse from ‘global shocks’, and has no real independence and little room for manoeuvre. This subordination of the UK economy to the world crisis was the main message from the latest report of the Bank of England.
The report asks: ‘How have world shocks affected the UK economy?’ It answers that due to its ‘close integration’ into the rest of the world economy, the decline in the ‘domestic economic environment’ has been shaped ‘in part, by broader global developments’.
The Bank cites ‘external’ events ‘such as the euro-area crisis’, as well as ‘ones that are common to many economies…such as the stresses in global financial markets over 2007–09 and the large swings in commodity prices since 2008’.
The report continues: ‘That the impact of these world events on the UK economy has been sizeable is well understood.’ The Bank adds: ‘Global influences drove the bulk of the decline in UK output during the 2008/09 recession – deducting over 6 percentage points from annual UK GDP growth at the height of the downturn – and they held back the recovery over 2011–12. Overall, world shocks are estimated to account for around two thirds of the weakness in the level of UK output since 2007.’
The Bank warns of ‘the transmission of world shocks’ and the ‘measures of economic uncertainty across a number of countries in the wake of the financial crisis.’
The Bank estimates that ‘Around one fifth of the total impact of world shocks since 2007 is estimated to have been transmitted via the trade channel, as demand for UK exports weakened and UK import prices increased. The bulk of the impact, therefore, is attributed to a combination of financial and uncertainty channels. The financial channel is likely to have resulted in a tighter supply of credit and more volatile asset prices in the United Kingdom.’
Prices rose to a nine-month high amid concerns that developments in Iraq may shut down Middle East oil supply, an international factor that will devastate the British economy.
Brent crude futures rose 3% to $113.27 per barrel, while US crude gained more than 2% to $106.71, the highest reading for both since September. ‘If this conflict knocks out Iraq as an exporter, that would have significant impact on prices,’ said Christopher Bellew, a trader at Jefferies Bache.
The developments have also hurt global stock markets. Shares in the US fell on Thursday and major stock indexes in Asia were also down in early trade on Friday.
The Middle East is one of the biggest oil producing areas in the world and there are fears that if this conflict escalates further, it will devastate the advanced economies.
On Thursday, US President Barack Obama said his government was looking at ‘all options’, including military action, to help Iraq fight Islamist militants.
Timothy Ghriskey, chief investment officer at Solaris Asset Management LLC said: ‘Geopolitical concerns have definitely taken over. It’s a very fluid situation and things are happening very fast, it seems.’
Meanwhile, the pound has risen near to a five year high after the governor of the Bank of England, Mark Carney, signalled interest rates may rise this year. Sterling rose 0.32% against the dollar to $1.698, while against the euro it was up 0.15% at 1.251 euros.
In a keynote speech, Carney said a rate rise ‘could happen sooner than markets currently expect’.
The consensus among economists was that rates would rise in the first half of next yearto 5%. This would ruin millions of mortgage holders.
After Carney’s speech market interest rates rose ten basis points on Friday morning, immediately raising business borrowing costs, while the futures markets has already priced in interest rate hikes.
Capitalist Britain is truly under the threat of a combination of global shocks and their interaction with the world’s oldest and most antiquated economy.
