What’s happening in the UK economy?

The last week has seen a number of economic forecasts published in the UK. In June, the Bank of England warned of dire consequences for the UK economy if it chose to leave the EU. However, in its latest Quarterly Review, the situation appears to have changed.

Instead of forecasting a significant increase in unemployment, it is now suggesting that 250,000 fewer jobs will be lost than it anticipated and has cut its unemployment forecast from 5.5% to 5.0% for this year, virtually the same as where we are now at 4.8%. It has also reduced its forecast for wage growth,  implying that the “natural” or equilibrium rate of unemployment might be closer to 4.5% than the 5% previously thought. However, this is not fully accepted with some economists pointing to increased union action and skills shortages in some industries as signs that wage inflation will increase.

Inflation has already increased to the highest rate for two and a half years, with the CPI rate reaching  1.6% in December (compared to 1.2% in November and 0.9% in October) particularly due to increased air fares, food  and fuel prices. This was the highest rate since July 2014. All forecasts agree that the rate will continue to increase. Manufacturers’ prices are rising at the fastest rate for 25 years following the drop in the value of sterling and inflation is expected to reach the target rate of 2% next month and overshoot it for the next three years. Many forecasters therefore now expect interest rates to rise in 2018 rather than 2019.

The National Institute of Economic and Social Research, a well-respected think-tank, has revised its forecasts for UK growth upwards by 0.3% to 1.7% this year and 1.9% next year and they also suggest inflation will peak at 3.7%, slightly higher than the Bank of England estimates. The increased inflation rates are likely to exceed the rate of increase of incomes, therefore slowing the rise in consumer spending which has fuelled the UK economy recently. According to The Economist, in the last three months of last year, consumer spending enjoyed its fastest rise since 2004. However this increase in spending was accompanied by an increase in borrowing and, according to the Bank of England, consumer credit growth has slowed, increasing by only £1bn in December, compared to £1.9bn the previous month. If this continues, then UK growth might not be as positive as suggested.

Meanwhile in the eurozone, things are also looking up. Unemployment dropped to 9.6%, the lowest level rate since April 2009. However this average hides significant variations between Germany at 3.9% and Spain at 18.4% (and 40% youth unemployment). Data from Eurostat (the EC statistical office) from the end of 2016 suggests that economic growth has increased to 0.5% in the last quarter of 2016 and 1.7% for the year (although still below the UK’s rate). Although these figures might not seem particularly impressive, this is the highest rate of eurozone growth since the start of 2015. Finally, to complete the package of good news, inflation has also increased from 1.1% in December to 1.8% in January, approaching the target rate of 2.0%. This is encouraging since as recently as May, the eurozone was in deflation.

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