Why we should listen to David Cameron’s warning on the economy

November 19, 2014

With six months to go until the next general election and a few days from an all-important by-election, Prime Minister David Cameron has said that the global economy is at risk from another recession. This came less than a week after the Bank of England said that the UK economy is likely to grow at a healthy 3.5 percent this year and it could even weather the storm from weak growth across the Channel.

So who are we to believe: Cameron or the Bank of England, and should we be afraid? In terms of trust, you are brave to trust a politician, regardless of what they say. Regarding the Bank of England, they are renowned for changing their economic forecasts, so it’s always best to take their views on the future of the economy with caution.

The sub-text of Cameron’s message is clear: it’s six months before election day in the UK and the Conservative message seems to be “vote for us, we have more work to do”, thus having a recession bobbing on the horizon could be advantageous for Cameron and co. The timing of his comments is also worth noting since they come straight after the G20 leaders meeting in Australia; so this could be the equivalent of a kick in the butt to Cameron’s fellow G20 members to take a bigger stand against Ebola and Russian aggression in Ukraine.

But does Cameron have a point? Some politicians think that everything is fine and dandy in the world as long as stock markets are going up. The major U.S. stock indices, including the S&P 500, have made record highs this year. The UK’s FTSE 100 is a mere 250 points away from its highest ever level reached in 1999. This could lull some world leaders into thinking that everything is fine and they can take their eye off the ball, spending with abandon like the good old days before 2007.

Let’s forget Cameron’s political motivation for one moment – his warning is useful for world leaders and the man on the street for a couple of reasons. Firstly, it brings some reality back to the markets that risks exist – Ebola, Russia, Middle East tension, a stagnant euro zone and a recession in Japan should be sending shivers down the market’s spine. However, markets find it remarkably easy to look the other way as risks start to build up. Instead, things can get to boiling point and then explode, causing market carnage. Thus, just because the FTSE 100 is creeping closer to record highs does not mean that all is well in the world.  Secondly, the next couple of years could see even more risks accumulate, so we shouldn’t take 2014’s performance for granted.

As we near the end of 2014 clouds are gathering on the horizon. The Federal Reserve is planning on hiking interest rates for the first time since the financial crisis, if oil prices continue to fall then we could see oil producers start to halt production, which could cause a price shock when we least expect it. Even if oil producers don’t try t0 engineer an oil price rise there are risks to the economy since disinflation is rife in the western world. Prices have been falling in Europe and the U.S. and if this leads to deflation it could trigger economic meltdown and the next global crisis.

While disinflation in the UK is unlikely to be keeping the prime minister up at night, his comments should not be discarded as merely electioneering. Any world class analyst or economist would be justified to say the same thing as Cameron at this stage of the economic cycle, which is why we should listen to his message, even if it does play into his pre-election campaign.

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