UK Economy Update – Is the party over?

Depending on which economic commentator you read, the UK economy is either heading for problems or is set to continue on a reasonably steady path for some time to come. What is particularly interesting (to an economist!) is that the different predictions do not result from different data but from different interpretations of the same data.

On the downside, inflation has jumped from 2.3% to 2.7% and is predicted to rise further because of the fall in sterling since the Brexit vote last June. Consumers are also suffering as real earnings are £1,700 lower than they were before the Crash and are likely to fall over the next two years as inflation exceeds wage increases.

Economic growth has slowed because of a cut-back in consumer spending which is   partially the result of higher import prices following the fall in the value of the pound since June and might also be a reflection of falling confidence in the UK economy among consumers. It grew by only 0.3% January to March, compared with 0.7% in the last three months of 2016 while the figures for GDP per head are 0.1% and 0.5% respectively.

On a more positive note, the UK is still the 5th largest economy in the world (but is predicted to be overtaken by India before the end of the year) and unemployment is down from 4.7% to 4.6%, the lowest since 1975. It was not long ago that we thought 5% was the lowest we could hope for without causing a major increase in inflation. Wages, which we would normally expect to be rising fast given the slow level of unemployment, are rising at about half their rate of  increase before the financial crisis. However this is is not totally beneficial since a reason they are rising so slowly is the low level of UK productivity which fell in the first quarter of 2017 compared to the last quarter of 2016.

The balance of payments deficit dropped significantly in the last quarter of 2016 as export orders for manufacturing have increased following the fall in the value of sterling. Unfortunately, this might have been a temporary improvement since the first quarter of 2017 saw the deficit in goods increase as imports rose and exports fell. The deficit in goods AND services also rose for the first quarter to £10.5bn, almost double the previous quarter’s figure of £5.7bn. Concern over the increase in house prices has eased since they are currently rising at their slowest rate for four years; however they are still currently averaging 6.1 x average earnings compared with a long-term average of 4.3 x average earnings. The peak was in 2007 (just before the Crash) when they reached 6.4 times earnings. If the housing market slumps over the next few years then this will have a significant impact on the economy from its impact on associated spending (furniture, white goods, carpets, etc), the wealth effect and the impact on consumer and business confidence.

The latest Bank of England forecasts show the economy growing well, averaging 1.8% over the next three years, but these are based on the Government managing to negotiate a “smooth” Brexit, with the implication that a problem with the negotiations will result in lower growth, inflation rising no higher than 2.8% and slower consumer growth being compensated by higher business investment and exports, two areas where the UK has failed in over recent years.

It is difficult to take into account are the economic shocks which we might face over the next few months. For example what will happen to confidence in America if there are serious revelations about another member of President Trump’s team being involved with Russia. Then,  if the American economy slows, what will that do to UK exports?What will happen to business confidence, and hence investment,  over the next two years as leaks about Brexit negotiations hit the news headlines? What will China do over the next few years in terms of global expansion?

Not to worry. As Keynes wrote in 1923 – “In the long run we are all dead”.



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