As the economic recovery continues, the powerhouse BRIC economies are now being referred to by economists as “the fragile five”. BRIC economies include Brazil, India, Indonesia, Turkey and South Africa.
Economies that were still posting growth during the worldwide recession are now finding that inflation is making their cheap goods and services less attractive in the global economy.
This is resulting in pressure on the exchange rates for those currencies, which is a fairly typical post-recessionary dilemma. It appears China is still growing through the sheer size of its economy although again the so-called cheap goods are not as cheap now the global economy is rebalancing.
The unusual emerging economy is Russia, which is managing to outperform the rebalancing owing to the fact that it exports so much gas to China and the EU. So many economies are now dependent on Russian gas that economists are predicting this could be a black swan event for worldwide economic recovery. If diplomatic relations with Russia become more strained, it could choose to reduce supplies.
At the minute the only two economies not impacted by this would be the UK and the USA. The USA has been generating its own cheap energy from fracking and alternative energy sources and benefits hugely from the fact that land is really cheap in the USA. As far as the experts can tell, the UK does not import any Russian gas and therefore is not a hostage to fortune.
Quite often these macro-economic considerations seem too distant and theoretical to have much of an impact on the North East’s economy. However, in simple terms the thing that we have to take notice of is that however these macro-economic issues play out, there will be rises in interest rates both in the UK and elsewhere in the world.
It is likely that the USA will have an interest rate rise this year when it stops quantitative easing. It is equally likely that the UK will not have an interest rate rise until the third quarter of 2015.
Obviously, interest rate rises are not free from political influence in the UK. Equally obvious is the fact that even the Governor of the Bank of England will not increase interest rates prior to a general election. Once the election is out of the way, then it is likely that there will be two interest rate rises in quick succession in the UK.
While the Bank of England uses GDP growth as its benchmark to consider interest rate rises, and has a target of maintaining 2% GDP growth, it is as likely that the unemployment rates will be a key influence on the rate rises. If unemployment falls as low as 6% or less, this could trigger a rise.
It should be noted, however, that the rises in the UK and the USA are planned. Elsewhere, circumstances could force rises to tackle inflation. Inevitably interest rate rises have an impact on raw materials and cost of living, so it could be prudent to plan for these and factorthem into business planning for 2014/2015 and 2015/2016.
Neil Warwick, partner EU and Competition Law, Bond Dickinson