As it becomes easier for goods and services to be traded around the world, and as financial markets become more efficient, those in charge of running even the largest economies cannot ignore the external environment. Whether it be the threat of a recession in the US, a sharp rise in oil prices, or a slump in share prices on the world’s major stock markets, they will have an important bearing on the performance of individual economies and therefore on the decisions of policymakers.

In the case of the UK, its role as a major trading nation and its position as a leading financial centre have always left it vulnerable to external events. Nor is this a recent phenomenon. Back in 1931, the government of the day was eventually forced to take sterling off the Gold Standard after a severe international financial crisis and a run on the pound. Since then, the devaluations of 1949 and 1967, the oil shocks of 1973, 1979 and 1986, the ERM crisis of 1992, and the bursting of the dotcom bubble in 2000, all reflect the power of external forces.

In view of the above, no assessment of the prospects for the UK economy can be made without first understanding trends in the global economy.

• The demand for our exports depends, to a large extent, on the health of other major economies, such as the US, Germany and France, which are our biggest markets.
• The relative strength of other economies compared with ourselves, and expectations about movements in interest rates, has an important bearing on sterling’s exchange rate.
• Trends in the value of the pound, coupled with movements in international commodity prices, influence the amount which British businesses and consumers are required to pay for fuel and raw materials, and so has a bearing on our rate of inflation and hence on the stance which the Bank of England adopts towards interest rates.

Even though the UK has enjoyed a period of stability in recent years, with no major economic or financial crisis since our enforced withdrawal from the Exchange Rate Mechanism (ERM) in September 1992, developments in the world economy have, nonetheless, still played a crucial role in moulding the pattern of growth in the UK.

Some examples of events which have had an impact on the performance of the British Economy include:

• The Asian crisis of 1997,
• the bursting of the stock market “bubble” in the spring of 2000 and the subsequent prolonged slump in equity values and the global industrial recession,
• the political and economic after-shocks of the terrorist attacks on America in September 2001,
• the uncertainties in the run-up to the Iraq war in 2003,
• the rapid industrialisation of China and India,
• the long-running structural economic malaise in Japan and Germany,
• the surge in oil and commodity prices from 2004
• and most recently the global recession and credit crunch in 2008-09.

The close interdependence of all the major economies has made it imperative that institutions be put in place for the co-ordination of economic policy, especially at times of crisis. The activities of the International Monetary Fund, the World Bank, the World Trade Organisation and other such bodies, all bear testimony to the general acceptance of a common interest in promoting a stable world economic order.

The annual summit meetings of leaders of the G8 major economies and the World Economic Forum are only the most visible aspect of the massive international effort which goes on through a multiplicity of bodies to enhance stability, resolve crises, and promote the free and fair flow of trade and investment.