UK Q1 slowdown: should we be concerned?
Only a week ago, markets had priced the likelihood of a Bank of England (BoE) rate increase at 86 per cent. Mortgage providers, somewhat dubiously, even built this into their lending rates, especially the big banks. On the back of news that real wages were on the rise, cautious optimism was widespread, and sterling began to flex its muscle in anticipation of a hike.
However, all of that suffered a blow last week, as the Office for National Statistics revealed the economy grew by just 0.1 per cent in the first quarter of 2018 - considerably lower than the already-modest prediction by the BoE of 0.3 per cent.
The breakdown of this growth figure was particularly grisly for construction, which underlined its current state of recession by slumping to the tune of 3.3 per cent. Even manufacturing - whose performance has been impressive in recent times - could only eke out growth of 0.2 per cent for Q1, while the robust services sector managed just 0.3 per cent.
So, what went wrong?
The Chancellor implied that a significant portion of the blame lay at the door of the cold weather, which many believe hampered construction, while also reducing the number of feet through the door of retail and high-street stores. Another suggested scapegoat was the collapse of Carillion, and the ripple effect it had on sub-contracting firms, thus doing far greater damage to the construction sector over the three-month period than the ‘Beast from the East’
Yet other viewpoints imply deeper problems, with services having consistently stumbled in terms of year-on-year growth since early 2017. A year-long spell of inflation outstripping wages has left consumers with little choice but to tighten their belts too, and although there is light at the end of the tunnel on this front, a lot of households are struggling for financial headroom.
Many also believe that the handbrake is being pulled up for manufacturing, with years of limited investment now resulting in capacity problems as demand surges.
Exports have also performed relatively poorly, with the combination of weaker Eurozone demand and a recovering pound leaving imports rising in higher volumes lately. While the past year has seen an improvement, there remain concerns about the general balance of the UK's growth.
And then of course, there is Brexit uncertainty. While the extent to which this is impacting investment, industry and consumption is difficult to quantify, it is likely to continue to play a role for the foreseeable future.
All doom and gloom, then?
There is always cause for economic pessimism if you search hard enough. But there are valid reasons to believe that the mediocrity of Q1 growth was just a blip - and the tentative arrival of some overdue warmth isn't the only one
For starters, growth forecasts remain steady. The most significant development is that of real wages though; or wage growth relative to inflation. In February, the former ticked up to 2.8 per cent, while the latter slipped to 2.7 per cent. More importantly, with the unemployment rate having now shrunk to an astonishing record low of 4.2 per cent, and inflation likely to ease back towards its 2 per cent target, real wages are set for an upswing. This, in turn, should have the double gain of giving retail and other sectors a shot in the arm, while also turning the tide on household debt.
And then there is the public finances, which registered a first current budget surplus since 2002 in March. Public sector borrowing for the month, meanwhile, came in £3.25bn lower than expected - in line with lower-than-predicted borrowing for the year as a whole.
Whatever one's thoughts on austerity, and the manner in which it was implemented, few can argue against the merits of restoring the public finances to sustainable levels, and while national debt is still touching £1.8tn, the corner looks to have been turned.
What about rates?
It appears as though the ship has sailed in terms of an increase in BoE rates at next week's MPC meeting. Such news on growth for Q1, and the likelihood that inflation is set to fall, will no doubt reduce hawkish sentiment.
Yet some economists have done a complete about turn, predicting that rates will not increase until December, or even well into 2019. This, surely, is too extreme a view. Should real wages continue to move in the right direction, it won't be long before inflation rears its head again, especially with there being such a small amount of slack remaining in the job market.
Of greater urgency though, is the need to normalise rates. A base rate of 0.5 per cent is, bar the period from August 2016 to November 2017, a 350-year low, and will provide an insufficient buffer if a downturn were to strike. Let us not forget that, as recently as 1989, rates were touching almost 15 per cent.
These are, of course, very different times that we live in, with the post-financial crisis recovery remaining a fragile one. But such historic rates deliver some perspective. Would a minor increase of 0.25 per cent really have such severe ramifications? It wouldn't be to everyone's liking. Yet with increasing pay packets and growth forecast to improve, a slow correction of rates over the coming months will surely do more good than harm. One thing is certain: it is not a can that can simply be kicked down the road indefinitely.
Our website offers information about saving, investing, tax and other financial matters, but not personal advice. If you're not sure whether peer-to-peer lending is right for you, please seek independent financial advice, and if you decide to invest with Lending Works, please read our Key Lender Information PDF first.
Wednesday’s Budget speech, coupled with the cut to Bank of England rates, represented a decisive response to the coronavirus. Here we analyse the impact it will have on mitigating disruption from Covid-19, along with the long-term implications of this significant fiscal stimulus.
Rumblings from the Treasury ahead of next week's Budget suggest tax grabs will be needed to fund increased spending, and it appears UK enterprise could be in the firing line. Here we articulate why targeting entrepreneurs and small business is ill advised.
In a difficult climate, customer acquisition and lead generation present stern challenges for UK retailers, and a great deal of marketing spend invariably gets directed towards getting feet through the door.
Over the last decade, there can be little dispute that the reputation of mainstream banks – and particularly the so-called ‘Big Four’ (HSBC, Barclays, Lloyds and RBS) – is at its lowest ebb.
The 2019-20 ISA season has been a damp squib, with banks disinterested in attracting savers’ cash, rates cut, and the stock market in freefall. However, the emergence of the IFISA means alternatives beckon for those seeking a stable middle ground in terms of risk and reward.
In a decade of slow recovery, the rapid rise in asset prices has been the standout. But how sustainable has price growth been, and could we be in the midst of a bubble?
Most people consider income tax to be a given, but in the UK it is barely two centuries old. In this article, we look at how this tax has developed over the years, and also why it is set to remain at the core of our tax system for many decades to come.
Open banking celebrated its second birthday last month, but has the ‘revolution for financial services’ that was promised actually come to pass? In this article, we look at the progress the initiative has made so far, and what the future holds in the face of high levels of scepticism.
On the face of it, a 'broken' energy market needed fixing, and the price caps introduced in early 2019 were heralded as the solution. But, one year later, have they actually helped consumers save?