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Economic Overview – February 2019
Interest Rates and Inflation
With the Bank of England reducing its growth forecast (see below), as expected, the Bank of England Monetary Policy Committee kept base rate at 0.75% (the last raise was in August 2018). Brexit uncertainty continues to concern both policy makers and industry generally, and many economists predict that once a resolution is found (assuming one can be found) then the economy will move forward, possibly at pace, suggesting that interest rates would need to rise to control any “overheating”.
This at a time when Central Banks worldwide are “easing the brakes off”, holding interest rates generally, and reducing the rate of Quantitative Tightening (QT), in contrast to the second half of 2018 where markets were becoming concerned that credit was being perhaps overly tightened.
Allied to the above, the UK inflation rate fell to 2.1% in December, from 2.3% in November, with the Consumer Price Index (CPI) at its lowest for nearly 2 years, pushed down by petrol prices. This figure is close to the Bank of England’s target of 2%, easing pressure on interest rates, and currently being outstripped by average UK pay growth, with the most recent available figures showing that wages excluding bonuses were up to 3.3% for the 3 months to October 2018.
The UK economy expanded at its slowest annual rate in 6 years in 2018 after a sharp contraction in December. Growth in the year was 1.4%, down from 1.8% in 2017 and the slowest rate since 2012 (source: Office for National Statistics). The ONS blames falls in factory output and car production for the slowdown, among other factors.
It follows forecasts of slower growth in 2019 due to Brexit uncertainty and a weaker global economy. There were some areas of positivity however, including the health sector, management consultants, and IT all doing well.
According to the ONS estimates, gross domestic product (GDP) fell in December by 0.4%, which included a drop in services activity (restaurants and retail etc) – this is the only time since 2012 that services, construction and production all fell.
As mentioned above, with a resolution of the Brexit situation, much of this slowdown could reverse fairly quickly, as manufacturing and services pick up on a satisfactory outcome.
Despite short-term concerns over growth, the number of people in work in the UK has reached a record high of 32.54 million. Unemployment was flat at the end of 2018 with a total of 1.37 million, whilst the number of job vacancies rose by 10,000 to a record high of 853,000.
The unemployment total is 68,000 lower than a year ago, with the percentage of UK population aged 16-64 in work at its highest rate since 1971. As mentioned above, wage settlements are running at 3.3%, however it is likely this will weaken this year as inflation has fallen, and that is usually the start point in any pay negotiations.
So why is employment strengthening as growth is slowing? The answer is that job figures tend to trail the rest of the economy, but if Brexit is resolved reasonably quickly, this may not be an issue.
UK house prices fell by 2.9% in January according to the Halifax (part of the Lloyds Group). The month-on-month figure can be quite volatile, with the annual rate showing a 0.8% increase, with the average home costing £223,691.
Brexit is clearly affecting both ends of the market, with many first-time buyers drawing breath as they see short-term house price movement downwards. Whilst demand and supply are currently closer to each other than for some considerable time, again a Brexit resolution may see a surge in demand with no corresponding change in supply, meaning upward price pressure. Resolution of Brexit may just see a wave of positivity throughout the economy.