Chancellor of the Exchequer George Osborne said a “dangerous cocktail” of global threats faces the British economy this year as he warned against allowing complacency to take hold.
His alert was underscored by a gloomy report by the British Chambers of Commerce showing both manufacturing and services weakened at the end of 2015. In comments ahead of a speech yesterday, Osborne identified the slowing economies of China, Brazil and Russia, the slide in commodity prices and escalating political tensions in the Middle East as potential hazards for the UK.
“Far from mission accomplished on the economy, 2016 is the year of mission-critical,” the chancellor told BBC Radio 4’s “Today” programme, explaining what he’ll tell business leaders in Cardiff, Wales. “The difficult times aren’t over; we’ve got to go on making the difficult decisions precisely so that Britain can continue to enjoy the low unemployment and the rising wages that we see at the moment.”
European and Asian shares dropped with US stock futures yesterday amid heightened concerns about the slowdown in China, the world’s second-largest economy. A selloff in Chinese stocks halted trading for a second time this week after the People’s Bank of China cut its yuan reference rate by the most since August. Billionaire investor George Soros warned that markets are facing a crisis. Sterling fell to its lowest level against the dollar since 2010.
Global growth estimated last year by the International Monetary Fund to be the slowest since 2009 could be much the same in 2016 if problems in emerging markets persist or market volatility continues, Osborne warned. The World Bank lowered its 2016 growth forecast this week to 2.9% from the 3.3% it projected in June.
“When you turn on your radio and you hear about the Chinese stock market or potential conflict between Saudi Arabia and Iran, you know that we are doing everything possible in our own country to prepare for whatever the world throws at us,” Osborne said.
There are also signs the UK is losing momentum. In particular, domestic demand — the engine of growth since the financial crisis — is starting to yield to the prospect of years more of austerity and the risk of a British exit from the European Union in a referendum that could be held this year. Confidence among UK services firms slid to a three-year low last month. In its quarterly report, the BCC said while its key measures of both services and manufacturing declined in the fourth quarter, the factory indexes fared worse, with many companies citing the strength of the pound as their biggest concern. The cloudy outlook adds to reasons for the Bank of England — which announces its latest policy decision on January 14 — to keep interest rates at a record low.
“The falling balances in the fourth quarter highlight the risk that the pace of growth may slow further in the short term,” said David Kern, chief economist of the BCC. The group cut its forecast for 2016 growth last month to 2.5% from 2.7%, citing a worsening global outlook.
While BoE officials signal they are in no hurry to follow the Federal Reserve, which raised the key US rate for the first time in almost a decade last month, Britain should be prepared for borrowing costs to rise from their record-low 0.5%, Osborne said. “We’ve got to be ready, but ultimately if and when interest rates go up that will be a sign of a stronger economy that is normalizing after the extraordinary crisis of seven or eight years ago,” he told the BBC.
Amid criticism of his budget-cutting plans from the opposition Labour Party, the chancellor defended his goal of turning a £90bn ($132bn) deficit in the latest fiscal year into a surplus by the end of the decade. “The British economy has performed better than almost anyone dared to hope, and as an issue the economy has slipped down the list of many people’s everyday concerns,” he will say in his speech, according to extracts released by the Treasury.
“But the biggest risk is that people think that it’s ‘job done.’ Many in our politics encourage this, irresponsibly suggesting that we can just go back to the bad old ways and spend beyond our means forever more.”