Business confidence continues to hold back economic recovery

Today there is depressing news on business confidence. It is, according to one survey, at a twenty year low.

Business confidence is by far the most important determinant of investment. It outweighs the influence of interest rates significantly.

If the outlook of firms improves and they start to expect better business prospects they will invest. If the invest then Aggregate Demand will rise and probably by a multiplied amount. And so the recovery will be formed.

But the survey says that business confidence is falling not improving. And so the dreaded double dip continues.

The Guardian reports the survey here

Monetary policy dilemma continues

It is possible that we are now approaching the point at which we can say interest rates will move up, possibly at the end of the year. Adam Posen, the most enthusiastic member of the MPC on easing monetary conditions, believes that the Bank has now done enough (or at least all it can).

Of course this had to happen. The markets decided this was a bit of a surprise and the pound was bid up in price, as the expected rise in interest rates was moved forward. The link between exchange rates and the interest rate couldn't be more clearly indicated.

But Posen also makes the point that interest rates alone are not enough to induce growth. Expectations, based on business confidence, are also crucial, but so is the ability to borrow money.

If the financial sector cannot lend money to businesses then even when firms believe it is worth investing and can afford the loan then the investment won't happen. The attached article shows how important it is to get all the pieces in the jigsaw in place.

The Independent article is here

The UK experienced an unwelcome fall in exports in the latest figures reported by the ONS. The trade gap widened as a result.

Perhaps the more surprising thing is that exports had been rising at all. Europe, the UK's biggest trading partner, has been experiencing such problems it would not have been a shock if they had bought less.

The concern for Britain is that, in a time when the UK desperately needs growth, a rise in net exports is an important factor in increasing Aggregate Demand. These figures mean that net exports is effectively reducing AD and so will reduce growth not boost it.

On the bright side imports have risen slightly. While bad for net exports now this can indicate returning consumer confidence and possibly improving disposable income.

The Guardian reports the trade situation here