Economic Context
2.10 The world economy performed well for most of 2007. The mood began to change, however, after August, when the US sub-prime mortgage debacle created a global liquidity crunch in the banking sector. By the year end, the real economy was more concerned about its prospects than it has been for some years. High commodity prices and other cost inflation pressures have also re-emerged, causing some to worry about a return of "stagflation". Financial markets remain volatile and uncertain and most commentators expect a sharp slowdown in 2008/9.
2.11 There is a growing tension between sound economic fundamentals and unsound financial securities. Business and consumer confidence is slipping in most developed countries, and investment and employment prospects may be waning. Despite inflationary pressure, all of the major central banks are expected to be cutting interest rates. The fear is really about whether this will need to be reversed because of higher inflation expectations, leading to a recession in 2009/10.
2.12 Concern about the UK housing market is growing but it will be the labour market that reveals whether things are likely to turn nasty. An overdue re-balancing of the world economy is underway, away from the domestic consumer towards exports and investment. This is likely to cause further currency swings too. Against this background, the medium term outlook for South West England is for a more subdued trading environment for regional businesses, albeit that the lags in the economy may mean the slowdown affects most of the region later rather than sooner in 2008. As the cyclical climate turns negative, structural change to make SW business more competitive - through technological innovation, new environmental areas of activity and skills enhancement - will become even more important.