Sunday, June 19, 2022
The UK's 'no mates' economy is down, but not quite out
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

My regular column is available to subscribers on This is an excerpt. Not to be reproduced without permission

The sun may have been shining but some of the lights have been going out all over the UK economy. There have been many falls from grace over the years, but the one that has occurred over the past few months has been particularly sharp.
Not so long ago, around the turn of the year, the UK looked well set. The government, preening itself on getting through the Covid-19 crisis, boasted of the strength of the recovery, which was to be the strongest in the G7. That was the case last year, partly reflecting the UK’s bigger fall in 2020.

Then, reality struck. The big inflation shock that was already building before the Russian invasion on Ukraine, and which has been made worse by it, has exposed the UK’s vulnerabilities. The British economy is weak and skirting perilously close to recession. You can see it in the forecasts.

Last November the Bank of England was predicting a modest 1.5 per cent growth rate for 2023. Now it thinks the economy will instead shrink by 0.25 per cent, though that did not prevent it from raising interest rates again on Thursday, for the fifth time in a row.

Its quarter-point rate rise to 1.25 per cent, on a split vote, with three monetary policy committee members preferring half a point, was its way of balancing a weak economy – it expects the economy to shrink by 0.3 per cent this quarter - and high inflation, with a new predicted peak of 11 per cent. Scary.

The Organisation for Economic Co-operation and Development (OECD) thought last December that the economy would grow by 2.1 per cent next year. Now it predicts zero growth. Consensus forecasts for growth are being cut. The CBI has just cut its growth forecast for 2023 from 3 per cent to 1 per cent and warns that even that will require government action to boost business investment.

Even last year’s strong growth story was not quite what it seemed. The economy has not been particularly strong since the middle of last year. The “oomph” it got from the lifting of Covid restrictions after the third lockdown in early 2021 did not follow through.

Sterling, meanwhile, has become a “no mates” currency, trading at times below $1.20 in recent days, which is even weaker than it fell during its initial post-referendum slump in 2016, the biggest of any major currency in the floating rate era. Some of this is due to a strong dollar, but the pound, trading below €1.15 at times in recent days, before recovering some ground, has also been plumbing the depths against the euro. Foreign holidays beckon for many people but they will cost.

A weak currency tells us something. International investors do not like what they see about the UK economy or British politics. Breaking international law in a way that threatens a trade war with your biggest set of trading partners to shore up a deeply flawed leader is a “sell” signal. Whatever the results of confidence votes among Tory MPs, there is not much confidence out there in this government.

Tony Danker, the CBI’s director general, said that government “grandstanding” over the Northern Ireland protocol was making international businesses think it was maybe not the time to invest in the UK right now. The money flowing into the UK may take the form of foreign buyers snapping up British firms at bargain prices as a result of low valuations and the weak pound.

What happens to the pound matters a lot, particularly at present. The weaker it is, the bigger will be the cost-of-living crisis and the pressure on business costs. Global oil prices have been higher than now than in the past but, priced in dollars as they are, the weaker the pound, the higher the sterling price, which has hit £100 a barrel in recent days. That is why petrol has been touching and in some cases exceeding £2 a litre. The UK is uncomfortably close to the top in one league table, that for the highest petrol and diesel prices in Europe.

Some of the economy’s woes were brought out into the open by the latest monthly GDP (gross domestic product) figures, published a few days ago. An unexpected 0.3 per cent fall in monthly GDP in April, with services, industrial production and construction all falling for the first time since the grim lockdown month of January 2021, told of an economy struggling to stay afloat.

Though the fall was distorted by an unwinding of NHS Test & Trace activity following the end of mass free testing, it still spoke of an economy that will stagnate, at best, for the rest of this year and most of next. Growth appears to have deserted us for the moment. The pandemic and Russia-Ukraine, two of my four horsemen of the Apocalypse, have inflicted damage at a time when we could have hoped for something better.

Even when the figures are not bad, markets appear to have such a downer on the UK that they decide they are. The latest labour market figures a few days ago showed rising employment, both in aggregate and on payrolls. Unemployment ticked up fractionally, though there was a small reduction in economic inactivity. The labour shortages that have plagued the economy may be starting to ease and there was even a small rise in self-employment.

Markets, however, focused on a big fall in real wages; regular pay adjusted for inflation. That is important, though is not news. And it would be worse if there was evidence that pay was chasing inflation higher, echoing the wage-price spirals of the past.

I am going to say here, and this may be controversial, that the gloom over the economy looks overdone. We have entered a period in which growth will be hard to come by and the risk of a technical recession – two consecutive quarters of falling GDP – are real. Compared with the wild swings we have seen over the past couple of years, however, including a phenomenal 21.4 per cent slump in GDP over two quarters in the first half of 2020, a technical recession, if there is one, will be small beer.

Other countries are facing similar pressures, even if so far they are not suffering such a bonfire of growth expectations. And I still think that we will see inflation falling over the course of next year, for several reasons, which will mean that we will eventually start to view some of our current problems through the rear-view mirror.

But if there is too much gloom around about the economy, fixing perceptions about British politics may be a harder task. We have never seen anything quite like this government, and not in a good way. But that is another story.

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