U.K. Economy Faces `Dangerous Cocktail' of Risks, Osborne Warns

  • China, commodity prices, Middle East cited as hazards
  • BCC says its factory, services indexes weakened at end-2015

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 a speech in Wales on Thursday, 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 U.K.

“Anyone who thinks it’s mission accomplished with the British economy is making a grave mistake,” he told business leaders in Cardiff. “2016 is the year we can get down to work and make the lasting changes Britain so badly needs, or it’ll be the year we look back at as the beginning of the decline. This year, quite simply, the economy is mission critical.”

George Osborne
George Osborne
Photographer: Luke MacGregor/Bloomberg

Asian, European and U.S. shares dropped on Thursday 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. Sterlingtouched 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 percent from the 3.3 percent it projected in June.

There are also signs the U.K. 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 U.K. 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 Jan. 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 percent from 2.7 percent, citing a worsening global outlook.

While BOE officials signal they are in no hurry to follow the Federal Reserve, which raised U.S. interest rates for the first time in almost a decade last month, Britons should be prepared for borrowing costs to rise, Osborne said.

“Inevitably, there is discussion about how and when we begin to move out of a world of ultra-low rates,” he said. “Higher interest rates are a sign of a stronger economy.”

Amid criticism of his budget-cutting plans from the opposition Labour Party, the chancellor defended his goal of turning a 90 billion-pound ($132 billion) 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,” Osborne said. “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.”