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Economic Overview – November 2017
For the first time in 10 years, the Bank of England raised base rate, by 0.25%, to 0.5% in November. The move reversed the cut in August 2016, which was made in the wake of the vote to leave the European Union. At the same time, Governor of the Bank of England, Mark Carney, suggested that it will rise twice more over the next 3 years.
The Bank has warned that the Brexit process is having a noticeable impact on the economic outlook, and has taken care to signal that any future rate rises will be “gradual and limited”. The expectation is that rates will rise to just 1%, in 2 increases of 0.25%, one next year, and one in 2020.
November’s published inflation figure was 3% – above official target of 2% – but the Bank argues that the main driver of that is Sterling’s 18% decline in value since late 2015, with the biggest fall coming directly after the Brexit referendum.
Currency inflation effects tend to push through the economy relatively quickly – sterling’s rapid fall leading to an increase in import prices, which may have seen inflation peak at 3%, before falling back to the target of 2% over the next 2 years.
The UK & US economies will expand more slowly in 2017 than previously thought, according to The International Monetary Fund (IMF). The suggestion is that UK growth will be 1.7% against its earlier forecast of 2%, also revising US growth down from 2.3% to 2.1%.
However, its overall global economic predictions of 3.5% growth in 2017 and 3.6% in 2018 remain unchanged. In its World Economic Outlook, the IMF said the “pick-up in global growth” that it had anticipated last April remained “on track”.
The IMF’s Chief Economist, Maurice Obstfeld said, “we have long predicted that Brexit would have some negative long-term effects, but in the case of this year’s forecast (downgrade) we are basing it purely on the observation of data for the first part of this year, which was weaker than expected”.
Unemployment in the UK is at a 42-year low, with wages continuing to lag behind the cost of living. Workers’ earnings, excluding bonuses, rose 2.2% in the three months to September compared with a year ago. But they fell 0.5% in real terms when accounting for inflation (see above), marking 7 months of negative pay growth.
The number of jobless – people not in work but seeking a job – fell 59,000 to 1.42 million during the period. The unemployment rate remained steady at 4.3% – its lowest rate since 1975 – and down from 4.8% a year earlier. At the same time, the number of people in work dropped to 32 million, down 14,000 from the last quarter (source: Office for National Statistics).
The simultaneous drop in the number of workers and unemployed people is due to the rise in people who are classed as “economically inactive”- those not working and not seeking or available to work. This includes people studying, retirees, the long-term sick, or those looking after family, and rose by 117,000 to 8.8 million over the quarter.
House prices across the UK are rising strongly and will continue to do so in the months ahead, the Halifax has reported. In the year to October, prices rose by 4.5%, up from 4% in September, and the fastest rise since February. The average price of a UK house is now £225,826.
The interesting element year is regional difference. The North West of England grew fastest, with London recording the lowest rise. Prices have also accelerated in some cities – notably Manchester. House prices rose by 7.3% in the North West, whilst the comparable figure in London was just 2.5%.
Rising house prices and stricter demands from mortgage lenders have made things tougher for many first-time buyers. Activity has dropped, with 31,100 loans being advanced to this group in
September, down 10% on the previous month, and 1% on the same month a year earlier.
Private rental prices paid by tenants in Great Britain rose by 1.5% in the 12 months to October, slightly down from 1.6% in September.