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Chalestra's mid-year economic forecast

At the beginning of the year, Chalestra's forecast for the economy was that the UK would remain on the upside of flat and that the European economy would continue to fall. Six months on, and that is still our forecast. There have been insufficient changes to the domestic economy for businesses to flourish, though we hadn't expected much to change.

The big holdup is, of course, tax. High taxes, whether business or personal, make for a very risky environment. Some of the governments tax cut offering comes to play this summer, with most starting to take effect next year. Estimates are that the government has cut its costs by around 5%, but that’s nowhere near enough to compare against the cuts which most companies, and most people, have cut, which is around the 40% mark. We think that there will be further cuts over the years ahead beyond what has been announced so far. There is also bureaucracy to consider as little has been done to reduce it.

It is also a risky environment for new startups. With consumerism thoroughly restrained by personal debt paydown, new startups are unlikely to find sufficient custom to continue business, and new owners are at risk of losing more than they originally invested. Yet new startups are vital to the governments efforts of paying down its own debt.

There are new economic risks approaching too. A lot of institutions, particularly banks and utility companies, are desperate to recapitalise. Their only route to recapitalisation, as they see it, is in enhancing their income from their customers, thus putting more pressure on those trying to pay down debt, or emerging from that scenario. It effectively undoes the governments efforts of putting money back in peoples pockets, and no emergence from the depression can thus be seen.

There are opportunities to be had, though, for those willing to take well-managed risks. A number of larger companies have been seen returning larger dividends to their shareholders: some have even had to steady the ship by cutting back on extraordinarily high dividends.

Europe, on the other hand, continues to fall. Much of Europe's woes and risks are masked by hugely increasing debt, largely through unconventional debt routes such as the IMF, which was never designed to bail out regions or wealthy countries. Economic output continues to be extremely weak, and largely bouyed by Germany. But so many countries failing to perform also puts Germany at risk, suggesting that the European economy is unlikely to return to growth for a long time to come. That is obviously enhanced by the huge cost of the debt in years to come, none of which has been forecasted.

If the government is right in saying that nearly half of Britains trade is with Europe, then one can see why the UK will have stunted growth for some time to come, and why we argue that the UK must trade more consistently further afield.

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