Autumn Statement Preview – State of the UK

So with the Chancellor’s Autumn Statement this week I thought I would give a little bit of an objective overview of the state of the UK and the key challenges, primarily as I don’t think they will be in anyway addressed with this statement, especially given the current political messages.

So if we were to look at a country’s economic state then how would we judge it?

The Chancellor currently is suggesting the UK is in a strong position but is it?

Well being Forex traders the easiest way to look for a countries strength is its exchange rate, this is after all a good way to compare a country to another economy (usually country but Euro messed that up).

So taking the past 12 months, the GBPUSD exchange rate suggests the US is doing a lot better than us but potentially the Eurozone isn’t.

GBPUSD down
GBP vs USD – weaker Pound vs US Dollar
EURGBP down
EUR vs GBP – weaker Euro vs Pound

Ok well that makes a bit of sense, so UK is in general not as strong as the US but possibly a bit stronger than the Eurozone.

Thats a good start;

Now we could look at GDP this looks at the countries Gross Domestic Product which is often used as a measure although has challenges in that it frequently seems to get rebaselined as well. Essentially though its a way of looking at a countries production and income (that is extremely over simplified).

If we consider this on a quarterly and annual basis, well the picture for the UK doesn’t look that great but you could definitely spin this to the positives, it is potentially getting better (hmmmm).

UK GDP QQ

UK GDP YY

Ok so, so far pretty difficult to say the UK is strong, possibly in direct comparison to the Eurozone but surely that’s not a fair comparison.

Ok so let’s look at a couple of other key factors. Our Current Account is essentially the balance of trade we are running at the moment adjusted for our cash flow.

UK Current Account

This is where we start to get a pretty bleak picture.

See the key challenge at the moment for the UK is that it has no real way of paying off its debts.

The country as a whole doesn’t earn enough either through exports or its own productivity, this means each month we are left with big bills to pay and thus our overall level of debts, this means we run a massive debt to GDP ratio, which at the moment is unlikely to really budge.

UK Debt to GDP

Like you or I, high debt and low income makes it more difficult for us to borrow, this means we then have problems paying for services and goods. Take the NHS recent example.

To create enough leeway for us to get cash to pay for things we need we need to take one of two routes, you either need to cut your costs or you need to boost your income and more likely do both.

Challenge with the UK is there is no really visible way to increase income. One of our main exports is Oil and the price at the moment has been dropping. This means we need to consider more drastic cuts to the current UK budgets.

Cuts then impact earnings in the UK as it will inevitably mean reductions in wages and salaries as you either cancel infrastructure projects etc… this then has a knock on impact.

Therefore what you need to do is typically make large enough cuts to far outweigh the impact on wages….oh dear what a political nightmare.

See all governments are focused on short term as they need to ensure they are re-elected otherwise they don’t get to change policy and frankly who is going to vote for a government that says they are going to make some very painful decisions.

Honestly I doubt any of the political parties have anyway to currently solve this problem but will claim they do anyway.

Ok so what will we expect well, I suspect a lot of the election focus and what the Chancellor will try and highlight is that UK is doing well and there is extra funding for a few things but these come at a cost (more taxes would be a start). The elections will focus on tiny marginal cost cutting exercises like consolidating departments in Government (I am sure not even close to the amount of slack they have – sure any senior business CEO of a private firm could cut 4 times the amount of slack out of government departments) and how they all find some additional cash to fund specific services that are important to their messages.

The key though is can they realistically find extra money and I suspect not. The honest thing for a politican to do would be to stand up and say, well current government have probably done the best they could with a terrible situation, but if we want to be stronger in future years we need to make some epically difficult decisions, you will all hate us for it, but its the right thing to do…well I suspect they would win 5% of the votes with that but thats my two pennies worth.

Now if you fancy playing the game and seeing if you can cut the deficit and help the UK prosper in future years the FT came up with this handy little tool.

http://www.ft.com/cms/s/0/abe91fdc-4e08-11df-b437-00144feab49a.html#axzz3KevvwaAF