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Home > News > Good and b...

Good and bad news from an economy in uncharted territory

In the no-man’s land between a referendum and a snap election, what are the key economic indicators telling us?

Elections have long been won and lost on the state of the economy. So Theresa May’s decision to call a snap poll just as UK growth appears to be slowing has raised eyebrows. But with the Brexit vote predicted to put more pressure on households as the year goes on, the prime minister may well believe this is as good as it gets for economic news.

With less than six weeks to go to the election, a look at the economic backdrop reveals there is both good news and bad for the government.

Good News

Business activity continues to rise
Defying the doomsayers, the predicted post-referendum slump in business activity simply has not happened. Companies are still spending and hiring. Employment is at a record high. Surveys suggest some companies are enjoying a boost from the weak pound as it makes their goods and services more competitive in overseas markets. Meanwhile, the global economy has shown signs of improvement, again helping exporters. But the flipside to the weak pound is higher import costs for businesses, leading food companies and others to complain of pressure on margins and to raise their prices. There are also fears that those reliant on consumer spending will suffer as higher living costs erode Britons’ spending power.

The deficit is coming down
Chancellor Philip Hammond pledged to bring down borrowing and managed to deliver some good news on the deficit last week. Borrowing for the tax year ended in March was £52bn, roughly in line with the £51.7bn predicted by the government’s independent forecaster, the Office for Budget Responsibility. That was a 28% drop from the previous year and the lowest gap since the eve of the financial crisis, helped by strong tax receipts as the economy continued to grow in the months following the Brexit vote. But details of the most recent public finance figures suggest the government faces tough challenges to bring down the deficit further. March figures pointed to a slowdown in receipts from income tax and from VAT as retail sales were hit by higher prices in the shops.

Stock markets are near record highs
The pound’s heavy losses have been the stock market’s big gain since the Brexit vote. When sterling weakens, it helps the many companies in the FTSE 100 index that report in dollars and those that export from the UK. So while the pound is down around 13% against the dollar since the referendum, the FTSE 100 is up around 14% over the same period. Optimism about Donald Trump’s planned tax reforms and spending spree has also lifted stock markets around the globe, providing a further fillip to the FTSE 100, which set new record highs in March. That provides some feelgood soundbites for campaigning Conservatives. But ultimately, a share index populated by big international mining companies, pharmaceutical giants and banks tells you little about the UK economy.

House prices are steady
Among the dramatic predictions made for the UK ahead of last year’s referendum, the International Monetary Fund warned that a vote to leave the EU could spark a property market crash.

In the event, house prices have been steady and are still rising in year-on-year terms. Recently, though, signs have emerged that the market is losing momentum. Nationwide’s closely watched barometer of the market showed the average price of a home fell by 0.4% in April to £207,699, following a 0.3% drop in March. The annual rate of house price growth slowed to 2.6%, the weakest since June 2013.

But that cooling-off is by no means bad news in a market where first-time property buyers have long felt shut out by high prices.

Bad News

The economy has slowed

Economic growth beat expectations following the Brexit vote and the UK finished 2016 as one of the fastest growing advanced economies. However, growth has slowed sharply in the opening months of this year amid signs that rising inflation is hitting consumer spending, a key driver of the British economy.

GDP expanded just 0.3% in the opening three months of 2017, down from growth of 0.7% the previous quarter. It was the weakest performance for a year and missed economists’ forecasts for a more modest slowdown.

Inflation is at its highest for three years and rising
The pound’s drop makes imports to the UK more expensive and that effect has combined with higher crude oil prices to push inflation to 2.3%. That is above the Bank of England’s 2% target and the highest since the autumn of 2013. After more than two years of falls, food prices are now rising again and consumers are starting to notice the increase in their day-to-day living costs. As a result, consumer confidence deteriorated in April, with households becoming more gloomy about the outlook for their personal finances as well as the wider economy, according to polls.

Pay is falling in real terms
Inflation is rising but pay growth appears to be heading in the other direction, with employers unwilling or unable to award big rises. That cocktail is bad news for household finances because it leaves workers worse off in real terms. On the latest official figures, pay fell in real terms in February, marking the first drop in living standards in two and a half years. Regular pay was 1.9% higher than a year earlier while inflation was 2.3%. Looking ahead, economists expect inflation to rise further this year while wage growth remains weak. That bodes ill for an economy so reliant on consumer spending.

Consumers are borrowing more
One of the puzzles for policymakers last year was the resilience of consumer spending in the face of rising inflation. Bank of England governor Mark Carney noted that households appeared to be “entirely looking through Brexit-related uncertainties” but he suggested they were going on a borrowing binge in order to keep up spending levels.

Since his words of warning, there has been more evidence that Britons are indeed increasingly turning to credit cards and personal loans. They are also in a more precarious position when it comes to saving for tougher times ahead. The saving ratio – which estimates the amount of money households have available to save as a percentage of their total disposable income – hit a record low at the end of last year.

 

Source: The Guardian

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