Economic outlook 2014: how optimistic are you?

[Herr Tubthumper]

Interest rates have always been higher than inflation, that is how an economy works. All the time interest rates are below inflation it means the economy is broken.

This isn't the case according to Carney. His view on how an economy works is a bit different.

 

[Uncle Spielberg]

Not to mention the massive damage this 0.5% interest rate has had on the culture and attitude of saving for the future and pension planning as most people don't bother anymore and will never do again.

 

[Uncle Spielberg]

This isn't the case according to Carney.

It is if unemployment falls below 7%. That is his measure and some economists think that could be by the end of 2014.

 

[sten_super]

Interest rates should NOT be below inflation rates. Interest rates have been 10% before with inflation at 7% and the economy was booming. A higher interest rate is not the sign of a poor economy, quite the opposite.

You've either not read or not understood what I said. Interest rates are effectively a way of incentivising consumers and businesses to save money. If interest rates are high, saving money becomes more attractive (as the potential gains are higher), while borrowing money becomes less attractive (as it's more expensive). My point is that interest rates have to be tailored to current economic conditions. At the moment, economic activity is growing very slowly, and that's with spending and borrowing as 'attractive' as the Bank of England can make them. Raising interest rates would result in people and businesses saving more and spending less, reducing economic activity and therefore (in all probability) economic growth.

 

[Uncle Spielberg]

You've either not read or not understood what I said. Interest rates are effectively a way of incentivising consumers and businesses to save money. If interest rates are high, saving money becomes more attractive (as the potential gains are higher), while borrowing money becomes less attractive (as it's more expensive). My point is that interest rates have to be tailored to current economic conditions. At the moment, economic activity is growing very slowly, and that's with spending and borrowing as 'attractive' as the Bank of England can make them. Raising interest rates would result in people and businesses saving more and spending less, reducing economic activity and therefore (in all probability) economic growth.

I understand why rates are at 0.5% it is because the economy is still in a total mess.

 

[Shropshire Seagull]

I believe it was Keyensian economic theory that said savings were a bad thing as they take money out of the economy.

So when you need folk to spend, to help get an economy back on its feet, disincentivising savers with low interest rates supports this.

I'm sure I heard the governor of the BoE say interest rates will rise once unemployment achieves a certain benchmark [can't remember what the benchmark was though]

 

[Herr Tubthumper]

I believe it was Keyensian economic theory that said savings were a bad thing as they take money out of the economy.

So when you need folk to spend, to help get an economy back on its feet, disincentivising savers with low interest rates supports this.

I'm sure I heard the governor of the BoE say interest rates will rise once unemployment achieves a certain benchmark [can't remember what the benchmark was though]

He said interest rates will remain low for 3 years (I think) and be reviewed if 1 or more of 3 IMHO unlikely benchmarks were met.

 

[Uncle Spielberg]

I believe it was Keyensian economic theory that said savings were a bad thing as they take money out of the economy.

So when you need folk to spend, to help get an economy back on its feet, disincentivising savers with low interest rates supports this.

I'm sure I heard the governor of the BoE say interest rates will rise once unemployment achieves a certain benchmark [can't remember what the benchmark was though]

See 43.

 

[sten_super]

It is if unemployment falls below 7%. That is his measure and some economists think that could be by the end of 2014.

He has backtracked a bit from this recently, mind. He's now said that even if it falls below 7% they make keep rates low - because he's worried that 7% will be reached without much of a rise in incomes, which would be required for a large number of households to withstand the increase in mortgage repayments.

 

[El Presidente]

The paradox in the economy is that the recession was caused by poor risk analysis and a credit boom, and the government's suggested solution to ending the recession is via encouraging consumers to borrow once more.

Economic fundamentals have not been addressed, the infrastructure is weak, inflation stubbornly high, and unemployment, whilst lower than originally predicted, is distorted by part time workers and reclassification of the unemployed.

Industry is not investing in either R&D or training, and we are churning out overqualified and inexperienced graduates who are taking jobs aimed at the less skilled. This has created a generation of unemployed and rapidly becoming unemployable non-graduates. This sub-sector of the workforce are unwilling/incapable of taking on low skilled manual labour, which gets snapped up by migrants, fuelling social tensions.

 

[TheJasperCo]

For me the scariest part of a recovery will be the interest rates going up.

That's what I'm greatly looking forward to actually, from a saver's point of view at least it'll be a long time coming.

 

[BigGully]

Its a funny one, I cannot tell what will happen next year, the Eurozone seems a broken project so all I can see is lots of political maneuvering.

I was brought up thinking interest rates were always quite high to dampen down inflation, which would be the curse of any economy, only to see interest rates at historic lows and inflation quite stable, albeit in a stagnant economy, I was also brought up thinking that you cant just print money, but everyone is into it at the moment and I dont see us producing anything, except for the aforementioned money !!!

We pay £billions to those that dont work, yet let those from other countries come and errmmm well work !!

We send £billions to other countries, irrespective of them using their own budget on space programmes and stuff, and we still send £billions to Africa and still the pictures my children see on our TV ( bought on credit ) look incredibly similar to the pictures I was watching in the 70's, remember Ethiopian eating a crisp joke, not allowed to do that joke at school now !!

But all that stupidity is 'ring fenced', so thats handy, .... oi Georgy boy turn on the printer can you .........

 

[Uncle Spielberg]

He has backtracked a bit from this recently, mind. He's now said that even if it falls below 7% they make keep rates low - because he's worried that 7% will be reached without much of a rise in incomes, which would be required for a large number of households to withstand the increase in mortgage repayments.

Even without a pay rise and small increase in rates most people would still be paying a lot less on their mortgage variable rate than 6 years ago. If people have not allowed for an increase they need to. My worry is that those who have saved so much have realigned their budget by taking out other commitments on an assumption their mortgage rate will be at an unrealistically low rate forever.

 

[jakarta]

The paradox in the economy is that the recession was caused by poor risk analysis and a credit boom, and the government's suggested solution to ending the recession is via encouraging consumers to borrow once more.

Economic fundamentals have not been addressed, the infrastructure is weak, inflation stubbornly high, and unemployment, whilst lower than originally predicted, is distorted by part time workers and reclassification of the unemployed.

Industry is not investing in either R&D or training, and we are churning out overqualified and inexperienced graduates who are taking jobs aimed at the less skilled. This has created a generation of unemployed and rapidly becoming unemployable non-graduates. This sub-sector of the workforce are unwilling/incapable of taking on low skilled manual labour, which gets snapped up by migrants, fuelling social tensions.

I can't disagree with most of that except that in my experience the top end of manufacturing industry IS investing both R&D and Training - I do work for Ricardo UK Ltd in Shoreham and Tesla Engineering (make MRI Scanners) in Storrington and both are heavily investing in these areas (then again both are highly profitable companies). The problem is we don't have enough 'top end' manufacturing and that is the fault of Governments of all stripes since the Second World War. Oh, and inflation of 2.2% is only 'stubbornly high' if you don't remember the 1970's!

 

[Giraffe]

There is a ticking timebomb with the amount of debt this country is in.

Currently all we are doing is working to reduce the deficit between income and interest on this debt. We haven't even managed that yet. Once we have done that, which will be incredibly painful on the public sector we then have to find a way to start reducing it.

Most economists think this impossible to achieve when you account for an aging population with virtually zero pension planning. In short something at some point will govery seriously wrong. This could lead to much larger unemployment, high interest rates, high inflation. General scaremongering maybe, but there is a certainty about it, the only question is when will this happen, and how bad will it be. My guess is it will happen once a new government is elected and realises that we face financial disaster unless we act dramatically and fast (picture Greece, but not quite as bad). Then we will see how we fair. The Government now know they should be doing this now, right now, but are too scared of losing power. In situations like this you need strong government, almost a dictatorship like when Maggie was first in charge. We don't have that, therefore big decisions are still being delayed. I just hope any newly formed government will be strong and face the challenge full on. The sooner we take these measures the better. We should have started doing this 10-15 years ago.

 

[Westdene Seagull]

Even without a pay rise and small increase in rates most people would still be paying a lot less on their mortgage variable rate than 6 years ago. If people have not allowed for an increase they need to. My worry is that those who have saved so much have realigned their budget by taking out other commitments on an assumption their mortgage rate will be at an unrealistically low rate forever.

I think you're forgetting how much other bills have gone up since - my G&E has almost doubled and the water has gone up. Add in the food bill is around 7% more and fuel for the car is significantly more and you can't blame people for relying on low interest rates.