ECONOMIC OUTLOOK
INFLATION came in lower than expected on Tuesday morning at 2.6% for the year to June – down from May’s reading of 2.9%. The drop was driven by falls in the cost of fuel, food and recreational services. Core inflation, which strips out volatile fuel and food costs, also fell from 2.6% to 2.4% compared to forecasts for no change.
Although this level of inflation will still mean workers are receiving a real-terms pay cut, with average pay rises of just 2%, the fact that inflation has dropped should reduce the pressure coming from some quarters calling for an interest-rate hike to try to dampen inflationary pressures.
On Monday business sentiment reportedly dropped to its lowest point for almost six years, according to IHS Markit. It said the net balance of UK firms expecting an increase in business over the next 12 months had fallen to +35% in June from +52% in February – the worst level since late 2011. The services sector in particular showed its lowest degree of confidence since June 2010.
Last month’s hot weather produced a bigger than expected pickup in retail sales, according to the monthly British Retail Consortium/KPMG sales monitor. Like-forlike sales were 1.2% higher in June than the same month last year, and follow a 0.4% fall in May.
The UK is close to full employment, it was confirmed last week, with the unemployment rate falling to its lowest level since 1975. The Office for National Statistics (ONS) said that the unemployment rate fell to 4.5% in the three months to May, down from the previous reading of 4.6%. The number of people in work rose above 32m. However, average wage growth slowed to 1.8% – well below consumer price inflation. This means falling wages in real terms – a trend that is likely to continue throughout the year.
Meanwhile, the Bank of England’s credit conditions survey showed that banks and other lenders are cutting back on credit card and other unsecured lending to households, reflecting caution over the UK’s economic prospects. Worryingly, the survey found that default rates on unsecured lending to households “increased significantly” in the second quarter of the year.
Ratings agency Standard & Poor’s said it expects UK economic growth to slow to 1.4% this year and 0.9% in 2018. It thinks the Bank of England is unlikely to raise interest rates until mid-2019. Moody’s also warned of slower growth to 1.5% in 2017 and 1% in 2018.
Government finances came under scrutiny in a report from the Office for Budget Responsibility (OBR), which said the Government’s finances would fail the “stress test” it applies to banks by a wide margin. Weaker growth, the likelihood of a future recession, higher interest rates and inflation threatened to put the public finances on an “unsustainable path”, it said. It warned that new unfunded “giveaways” would take the Government further away from its objective to balance the books in the next Parliament.