Gordon Brown said in the Budget that he expects the economy to grow by 2-2.5% this year and by 3-3.5% in 2003. In 2004, he expects it to return to trend growth (2.25%).
Trend growth means a natural level of economic growth with no inflationary pressures. The economy literally grows at its general trend.
Our View
The economy is warming up over the next 12 months and the above growth figures (excluding mortgage interest payments) whilst not cause for concern do show that they expect faster growth than they would want possibly increasing inflationary pressures and putting pressure on exchange rates. Exchange rates, whilst they affect the holiday pound, they mainly affect the costs of goods and services that we buy from and sell overseas thus affecting the economy substantially.
What does it mean to you? You may know that one of the tools used to control inflation is interest rates. Our view is that interest rates have the potential for increase towards the latter part of this year and early next year. In simple terms, people have less money to spend because their mortgage payments are higher and they save more because interest on investments is better thus not having as much money in the economy.
For mortgage payers this means that you should prepare yourself for possible increases in your mortgage payments. If you are looking to move or borrow more then please allow for this.
See our warning on mortgages .
For savers this may be better news - cash deposit interest rates may improve, gilts and bonds may improve, although capital values may decrease for existing holders. With profits rates and indeed annuity rates may also improve for those looking at retirement or secure investments.