How long till the economic outlook will be considered “normal”?

Bank of England governor Mervyn King believes it will be a long time before the economic outlook will be considered “normal”.  Wider economic problems around the world underline the fact that we cannot be confident that the recovery in demand, output and employment  in the UK will be sustained.  The fiscal tightening measures proposed by the Government will not choke off recovery, but it will slow economic growth over the next two years.

Of course it is encouraging that we have learnt recently of the strong 1.1% estimate of GDP growth in the second quarter, however we must be careful not to read too much into one number.  We continue to face the challenge of rebalancing the economy away from consumption towards net exports and raising our national savings rate.

The new coalition’s plans to cut the deficit are certainly ambitious but with the additional tightening set to come in the second half of the parliamentary term, the recovery should be firmly entrenched and the economy should be able to deal with the headwinds from the Budget.

On the assumption that the government is able to implement the overall reduction of £40 billion set out in the budget, the UK growth is likely to  struggle to reach 1% this year but should gradually speed up in the following years to give the UK a high-quality recovery based on trade and investment.

According to Ernst & Young base rate will remain at a record-low 0.5 % until the end of 2013. They said it would be necessary to keep base rate low in order to offset the effects of the Government’s spending cuts and to prevent inflation falling below 1%.  If this forecast is correct should you consider how your savings are invested?  Is cash still a good option or are other low risk, higher yielding products more suitable for some of your savings?