Read­ing the runes of the UK econ­omy ahead of BoE de­ci­sion

Irish Independent - Business Week - - Front Page - Andy Bruce

WITH the Bank of Eng­land look­ing poised to raise in­ter­est rates to a new post-fi­nan­cial cri­sis high, ev­i­dence about the health of Bri­tain’s econ­omy ap­pears mixed.

Most econ­o­mists polled by Reuters think the BoE will raise rates to 0.75pc to­day, although given the con­flict­ing sig­nals ahead of Brexit, some think this may prove un­nec­es­sary.

In­fla­tion and pay trends have been sub­dued of late, although most in­di­ca­tors of eco­nomic growth point to a mod­est re­bound from a weak start to the year that the BoE be­lieves was caused by bad weather.

Be­low are a few other in­di­ca­tors, some of them less closely watched, which also show the mixed for­tunes of the world’s fifth-big­gest econ­omy.

The RICS sur­vey has pointed to slow­ing ac­tiv­ity in the UK com­mer­cial prop­erty mar­ket lately, and although the PMI has yet to fol­low suit, it may do soon if his­tory is a guide.


Although con­sumer con­fi­dence has mostly held up in re­cent months, there are longer-term warn­ing sig­nals about the fi­nan­cial health of con­sumers.

Of­fi­cial data last week showed the num­ber of peo­ple in Eng­land and Wales reg­is­ter­ing as in­sol­vent hit a six-year high in the sec­ond quar­ter.

The Of­fice for Na­tional Sta­tis­tics also said house­holds’ out­go­ings sur­passed their in­come last year for the first time since 1988, adding to con­cerns about debt prob-

lems among many con­sumers.


Wage growth has re­peat­edly failed to pick up as the BoE has fore­cast, although the cen­tral bank has be­come less bullish about the out­look more re­cently.

In May the BoE said it thought over­all wage growth would av­er­age more than 3pc in 2018 and 2019 – it stood at 2.5pc in its most re­cent read­ing – but some econ­o­mists think even that may prove op­ti­mistic.

Aca­demics David Bell and for­mer BoE rate-set­ter David Blanch­flower say the job­less rate may need to fall be­low 3pc from 4.2pc now be­fore wages rise no­tably.

They ar­gue that un­der-em­ploy­ment, rather than un­em­ploy­ment, should be the main gauge of labour mar­ket slack. It re­mains el­e­vated com­pared with pre-fi­nan­cial cri­sis lev­els.

A look at the re­la­tion­ship be­tween wage growth and the un­em­ploy­ment rate over the last 15 years shows pay has failed to budge sig­nif­i­cantly higher – as would typ­i­cally be ex­pected – de­spite the job­less rate fall­ing to its low­est since the 1970s.


BoE Gov­er­nor Mark Car­ney has had to en­dure the “un­re­li­able boyfriend” ep­i­thet that a law­maker gave him in 2014 af­ter ap­par­ently flip-flop­ping over guid­ance about in­ter­est rates.

Mr Car­ney says the BoE’s guid­ance is aimed at con­sumers and busi­nesses rather than traders and jour­nal­ists. Still, the BoE’s last sur­vey of pub­lic at­ti­tudes showed a quar­ter of peo­ple – a record high – had no idea where in­ter­est rates were headed.

The Bri­tish Cham­bers of Com­merce has ar­gued against a rate hike on the grounds that its mem­ber firms pre­fer a sta­ble path for mone­tary pol­icy dur­ing times of such po­lit­i­cal un­cer­tainty.


No ma­jor busi­ness sur­veys are show­ing lev­els of growth in Bri­tain’s pri­vate sec­tor that in the past have been con­sis­tent with in­ter­est rate in­creases from the BoE.

The Lloyds Busi­ness Barom­e­ter shows busi­ness con­fi­dence re­mained sub­dued ahead of Brexit and has weak­ened of late.

But the Bank of Eng­land thinks the “speed limit” of Bri­tain’s econ­omy – the rate of growth it can sus­tain with­out gen­er­at­ing ex­cess in­fla­tion – has dropped to around 1.5pc year-on-year. If the BoE is right, rate hikes will be needed at weaker lev­els of growth than in the past in or­der to keep in­fla­tion un­der con­trol.


BoE Gov­er­nor Mark Car­ney

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