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.
