A report warns that the UK economy is headed for a slow recovery after the recession, and the Bank of England may compound this weakness by maintaining interest rates at an unsustainable level for too long.
KPMG predicts that the economy will grow by just 0.3 percent this year and struggle to achieve any significant growth in 2013. The consultancy claims that high rates of interest, rising unemployment and weak business investment will constrain the economy for the next two-years. Growth will only reach 0.9 percent next year.
In February, the Office for National Statistics reported that inflation was lower than expected.
A sharp rise in interest rates and inflation has slowed the economy’s growth and weakened demand. Bank of England held interest rates at 5.25 percent, a record high for 16 years, last Thursday. The nine-strong monetary committee that sets interest rates has signaled, however, it is close to lowering borrowing cost.
Andrew Bailey, governor of the state, stated that the economy is moving in the right directions to allow rate reductions. Two members, who had previously voted to increase rates, changed their minds last week. KPMG warns that delaying rate cuts may worsen the current economic weakness. The financial markets believe that the Bank of England is going to lower its base rate three more times this year starting in June.
KPMG believes that the Bank of England is likely to cut rates four more times this year.
Yael selfin, chief economist of KPMG UK said that although the GDP was slowly gaining momentum, “permanent weakness in the supply potential of the economy will prevent growth exceeding 0.2-0.3 per cent each quarter.”
AI can reverse this trend.
The UK economy is weakening and debt interest costs are rising sharply, despite tax burden reaching its highest level since World War II. Balance the books in the face of increased spending could be achieved by either increasing taxes or boosting growth. KPMG reports that, with a weak GDP growth outlook, it may be necessary to reverse some recent tax cuts after the elections.
Jeremy Hunt has reduced national insurance by four pence over the last two fiscal events. This was partly funded by the planned reductions of real-term government spending following the election. The election must take place by January 2025. ONS figures revealed last week that borrowing in February was more than expected at £8.4billion.