This is the $64 million question which leads to many other questions around the interest rate cycle and whether or not it has hit its peak. We can speculate about the false dawn of falling inflation, now wage growth is higher than inflation, but many would not agree that we are in a feel good economy which is expected from wages being higher than inflation, and people having more disposable income. 

The autumn statement later this week has been trailed as leading to tax cuts, but is this the wrong time to consider tax cutting and should we instead be looking at investment? The headroom the Chancellor is looking to exploit for political gain for the next election should not be squandered on inflationary tax cuts, but instead directed to long term changes in the investment culture within the UK for businesses. 

The sting in the tail for the inflationary story is that core inflation is not getting the intention it deserves within the current debate, as it remains very sticky and close to 6%. This core inflation is important as this is the figure which the Bank of England looks at when deciding interest rates. 

If anything, the core inflation will mean that interest rates will not come down as quickly as some may anticipate. This could mean the economy for UK PLC will slow down, with predictions that there will be a recession in 2024 given the backdrop of economic data surrounding retail sales, job vacancies and mortgage approvals. The question then is, without investment, how long and deep will the recession be?

If the direction of travel is clear in terms of interest rates, this has to be the right time to invest as you want to catch those productivity gains when the economy slows down to be in a position where your business is stronger, coming out of any slowdown. Where wage growth is higher, this has to be a situation where investment reduces wage cost, whether through new machinery, or through the new revolution of AI.

If this productivity can be captured, there will be change to working practises which may mean a four day week according to Autonomy within the next 10 years, so jobs which the UK have in abundance for management and data processing could soon disappear. But these productivity gains should not just be focused on a shorter working week, but look to enhance the service offerings of businesses to create a more robust business environment especially as the UK operates within a global economy. It is this global economy that has given the US the advantage of the Inflation Reduction Act and the EU the European Green Deal, these policies which aim to push capital investment and long-term growth through clean energy need to be replicated within the UK. This is where the Chancellor should focus any tax surpluses on and try to give back to businesses through full expensing for capital expenditure.

In a backdrop of China slowing down and global consumer spending contracting, have the Brexit ripples started to dissipate when we measure the health of UK PLC. There is a plethora of economic information which has just come out. The chattering classes are saying that the UK is hitting the top of the inflationary cycle but there are no indications whether interest rate heights will now slow down. All we have is a rearview mirror which indicates that GDP figures showed that the UK economy shrank by 0.5% in July which was greater than the expected 0.2% contraction. Yes, we could blame this on the inclement weather and industrial strife.

Yet, when looking further back in the rearview mirror, GDP in June was stronger than expected. With all this inconsistent data, are we on the precipice of the R-word which economic superstition does not allow you to say just like theatrical superstition only allows you to refer to the Scottish play. Will the Governor of the Bank of England hike interest rates at the risk of tipping UK PLC into recession?

The signposts all around us indicate trouble ahead when you look at Europe’s largest local council going bust, the HS2 debate about the Manchester leg, Barclays laying off 450 staff and the recent fall of Wilko. From experience, I know clients who have invested in training employees are reluctant to lay off people, so is this the start of a wider cutting back for UK PLC in employment costs? You have to bear in mind that wage data is showing that wage inflation has caught up with headline inflation, even though unemployment is slightly up from this time last year.

By way of comparison, when we look at UK’s biggest trading partner, you can see the Euro has had its tenth continuous increase in interest rate hikes to 4% which means that since the launch of the Euro over 20 years ago, this is the highest rate for the Euro.

With a similar picture across Europe, it is clear that you do not have to be a soothsayer to know that the earliest we can hope for a fall in interest rates, whether or not we are at the pique of the cycle, is going to be in 2025.

The good news is that UK and EU relations have started to thaw from an all-time low, such that the UK is now joining the Horizon Europe Scientific Research Initiative and the EU’s space programme known as Copernicus. An agreement has also been reached on the Northern Ireland Protocol.

With a fair wind, headline inflation could drop by the end of the year to may be 5% as a result of deceleration in increasing energy costs and food inflation. So as long as businesses have time to normalise the input costs despite no clear indications of travel from the available data, the silver lining is that it was harder twelve months ago and in twelve months we should be in a better position.