Economics - Like father, like son?

(From Financial Director)

Byline: Dennis Turner.

The scenario is a familiar one. The Americans lead a coalition that defeats Saddam Hussein in the Middle East but, less than two years later, the victorious President Bush is defeated by an obscure Democrat in the race for the White House. By common consent, 'it (was) the economy, stupid' that lost the Republicans the election.

Is it possible that what happened to George Bush senior in 1992 could happen to his son next year?

If the condition of the US economy is critical for George Bush junior's re-election, it is also of great significance to many people for whom the US presidential election is of no interest. In Britain, for example, the performance of the US economy will matter more in the short term than any actions the Monetary Policy Committee is likely to take. This is because there is little the policymakers here can do to stimulate activity in the domestic economy. Buoyed by a near 50-year low in interest rates and a record level of employment, British consumers continue to demonstrate that reports of their demise have been exaggerated. The government has now joined in the spending spree and, in Q2 this year, domestic demand rose by 4% on last year.

What dragged GDP growth down to under 2% was a 5.3% fall in exports, coupled with a 1.8% rise in imports. This reflects the fragility of our key overseas markets rather than a lack of competitiveness of British goods. Projections of growth in the eurozone have been regularly revised down, with France looking as if it could well join Germany, the Netherlands and Italy in a technical recession. Japan, the world's second-largest economy, has been in economic quarantine for years.

Then there is the US, the world's largest economy and still the UK's single largest export market. On its own, the US accounts for one-fifth of global output and the GBP28bn of exports the UK sold to the US in 2002 represented 15% of our exports of goods. There are also strong Anglo-American investment links. Not only is the US the preferred location for the overseas subsidiaries of many British companies, but the UK is also the first-choice European base for American companies. Hence, the US matters to Britain's balance of payments.