November 06, 2006	Monday	Shawwal 13, 1427

The British economy is in a state of resurgence at a time when inflation is visibly subdued. It is neither too hot nor too cold. The Organisation for Economic Cooperation and Development (OECD) in its recent report has described it as “Goldilocks” economy.

It is a description which used to be applied to the US economy in the Clinton years when the dotcom phenomenon on the back of information technology revolution had made it appear as if there would be no tomorrow for the American economy, as if there are going to no economic cycles any more. There would be one long unending run of well being for the Americans.

The British economy seems to have achieved this enviable position without going through any visible hardship and observers seem still surprised how stable the UK economy has been in the last couple of years.

The OECD revised up its forecast for growth in Britain this year to 2.8 per cent which is not very much off the mark from what the Bank of England has forecast (2.4 per cent).

One of the factors that is supposed to have contributed to this economic well being of UK in recent years is said to be the Bank of England’s interest rate policy. The bank’s Monetary Policy Committee is said to have responded to inflation risks and contained them despite a sharp rise in oil prices earlier in the year.

There are now speculations that the BoE would once again push the interest rates up slightly to counter inflationary tendencies that are traditionally seen during Christmas season.

But Mervyn King, the Bank of England Governor has sought to dampen the speculation saying it was not a ‘done deal’. Still the market is not seemingly persuaded by King’s statement. The expectation is that the Monetary Policy Committee when it meets next Thursday will increase the rate by a quarter-point to five per cent.

As of today inflation is estimated to be a little bit above target and in the words of BoE governor there does not seem to be a great deal of spare capacity.

“We have seen pretty strong growth of money and credit and a pretty buoyant housing market which may well underpin consumer spending,” he said.

The British economy slowed sharply last year as consumer spending and the housing market faltered, but an interest rate cut in August 2005 contributed to a rebound in growth, which recovered to 0.8 per cent in the second quarter from the first this year, above the economy’s long-term trend growth rate, as consumer spending and business investment recovered. This pace is expected to continue in the second half of the year.

The OECD also revised up its forecast for growth in the 12-member eurozone, to 2.7 per cent from the 2.2 per cent it had pencilled in May. Euroeconomy had grown more robustly than expected, helped according to experts in part by transitory factors such as the World Cup and time-limited construction subsidies, both in Germany.

Experts said that Europe has re-discovered the path of growth, although it is too early to say it is taking over the baton of global growth, and that the pace of growth - 3.5 per cent on an annualised basis - seen in the first half of 2006 was unlikely to continue in the second half.

The European Central Bank, which has been gradually raising interest rates from last year’s two per cent could probably continue raising them slowly from the current three per cent to a more neutral level that would neither stimulate growth nor slow it down. Many economists think that the neutral level may be between 3.5-4 per cent.

Oil prices are expected to continue to remain a risk to the global economy but experts seem encouraged that the world had continued to grow strongly in the face of a tripling of oil prices.

They said high oil prices were a response to strong demand around the world rather than an interruption to supplies, as previous oil price shocks had been.

The boom-like situation in the British economy has had a highly positive impact on its international financial centre—the City. The share prices are rising steadily as more and more mergers and acquisitions are taking place.

As a result, the employees in the financial services companies , lawyers and accountants and all those who provide professional services to the City firms, are being offered bonuses in amounts never before heard

The Centre for Economics and Business Research, which publishes quarterly estimates of the number of jobs and the size of bonuses in the City of London, had already predicted in July that the total amount paid out in bonuses would be up from £7.4 billion last year to £8.1 billion this year. But it has now increased its forecasts to £8.8 billion- an 18 per cent increase on last’s year’s figure.

The report attributes the increase in bonuses to the recovery in the stock market, which is now at a five and a half year high after jitters earlier in May, and merger and acquisition activity, which is usually supported by heavy incentives. The increase is being driven in particular by private equity buyouts, the report said.

The rise in the total amount expected to be paid out in bonuses also reflects an increase in the number of jobs in the City. The report estimates there are now a record 335,000 jobs in the City, up from 324,000 in 2004. The professional services industry is expanding fastest, with 5,000 extra positions having been created this year alone.

At the same time, however, individual bonuses are also getting fatter. The CEBR predicts that this year 4,200 City employees will receive a bonus in excess of £1 million, compared with 3,000 last year.

As a consequence of these lucrative returns for those who work in the City and for the City, the prices of high-end, luxurious houses are said to have gone up steeply.

And of course, China has its eyes on this domestic British bonanza. It is sending the SS Emma Maersk( appropriately dubbed as SS Santa) loaded with 45,000 tonnes of Christmas presents and fare for holiday season.

It is expected to unload 3,000 containers containing cargo of crackers, DVD players, toys, puzzles and clothes for supermarkets and stores before heading for another booming market—-the mainland Europe.

But this has not gone unnoticed by the opposition politicians. One said, all these goods could have been made in Europe. Some of them wanted that the real cost of the goods that the SS Santa is bringing in should include the environment, the markets destroyed in developing countries and the millions of lost jobs.

Britain exported more than £2.8 billion of goods to China last year but imported nearly £16 billion worth of goods, nearly 30-fold increase on 1980. The UK is Europe’s third biggest trading partner with China but in global terms represents less than two per cent of China’s trade.