WHILE there is a consensus that the UK economy is picking up, there are still those who make prophecies about impending doom as well as a sprinkling of those who expect us to continue to muddle on for the time being.
Is the UK economy making its long-awaited recovery, or are rising energy prices sucking the tiny ebbs of surplus income from the consumer? Depending on which day you read those headlines, which newspaper or section, either is true.
In the last quarter of 2013, unemployment dropped to 7.6% from 7.8%, according to the Bank of England. However, it has been suggested that this is a false economy, with ONS data putting the drop largely down to a swell in part-time work – which grew by 24,000 on the previous quarter to 1.46 million, the highest rate since records began in 1992.
The interest in unemployment stems from BoE governor Mark Carney’s claim that interest rates wouldn’t be touched until unemployment fell below 7%. However, the forecast concerning when that is likely to take place seems to be a moving target.
EY suggests that estimates for unemployment dropping below 7% by mid-2016 look conservative; BoE has optimistically said it will happen next year, two years earlier than the predictions it made in August. However, the Monetary Policy Committee believes there is just a two-in-five chance of it happening in 2014, instead giving 2015 a three-in-five chance. Meanwhile, the CBI said that it expects the bank rate to remain on hold in 2014 and 2015 – leaving the rest of us to take our pick.
Attempting to swerve the smog of confusion is Deutsche Bank UK chief economist George Buckley, who suggests a better indicator is housing volatility.
“The Bank of England may have to raise rates earlier than we think if inflation becomes a problem. The housing market is very sensitive to interest rates, especially with prices at very high levels – raising the risk of further downward adjustment,” he says.
This sentiment is echoed by former HSBC UK chief economist Dennis Turner, who says that “there seems little doubt that interest rates will stay on hold in 2014 and that overall inflationary pressures will be subdued”.
Regardless of the situation, the BoE should hold off changing rates, suggests Jeremy Cook, chief economist of currency brokers World First. “We would think that the Bank of England’s Forward Guidance report should keep rates low here in the UK until at least Q2 2015, given current trends, and this – we would hope – would allow business to secure funding for capital spending at low levels. Should the BoE make noises that monetary policy tightening is coming sooner rather than later, business can kiss those rates goodbye,” he says.
He warns that the US Federal Reserve “yanked the market’s chain” earlier this year concerning a tightening of monetary policy, and received nothing but higher mortgage and loan rates as well as a “very annoyed” Treasury market.
Meanwhile, Turner agrees that there is a “mess” in the US markets which needs addressing, something the UK should avoid by tinkering with its rates, adding that “the US will, as usual, find a way through its fiscal mess without addressing the underlying issues”.
What lies beneath
The UK has a couple of underlying issues of its own that need to be addressed, namely the ramifications of austerity measures rolled out after the last election. Turner suspects that the government will not “tighten the screw further” in 2014, with chancellor Osborne perhaps even loosening the purse strings. But he predicts further cuts will be imminent if the Conservatives win another election.
EY chief economist Mark Gregory believes austerity is set to continue into next year and possibly deepen. But he does offer a glimmer of hope: “The key drivers of UK growth in 2014 will be business investment and exports. If activity in these two areas picks up then the majority of UK businesses should be able to ride out the impact of further public sector cuts.”
Buckley has a mixture of positive and negative predictions for the UK next year. He believes the government will continue to take some 1% of GDP out of the economy per year as a result of various austerity policies, which will affect households and hit consumer-facing businesses. “However, austerity may be less noticeable as the recovery in private demand gains traction” into next year, he explains.
Despite the effects of austerity measures, the BoE upped its forecasts for growth in 2014 to 2.7%, compared to the 2.5% it predicted in August, with governor Mark Carney claiming the UK is recovering faster than expected, by way of explanation for the changes in its forecast.
His optimism is backed by the CBI, which predicts 2.4% growth of GDP in 2014 and 2.6% increase in 2015. Unfortunately, different institutes have different ideas about this. The Office for Budget Responsibility claims it will be about 2% in 2014 (see chart), Oxford Economics says it will be just above that, and HM Treasury is closer to 1.5% – showing a much more conservative outlook than both the CBI and BoE.
There may be trouble ahead
Although all are in agreement that growth is on the cards for the economy, it is not expected to be without hitches.
The UK, which relies so much on the EU, will feel the ripple effect from any problems among its member states. “The debt problems have not gone away, deflation is a real risk, and France could get sucked into the morass,” warns Turner.
EY’s Gregory concurs with Turner, suggesting that the eurozone crisis is “far from over”: “The periphery is still weak economically and recent data suggests that even some of the stronger economies are only growing slowly.”
World First’s Cook suggests that European credit growth “remains terrible” despite recent rate action by the central bank. Loans to non-bank borrowers, ie consumers, households and companies, contracted once again in September and October, further propagating the belief that the eurozone is in the midst of another credit crunch.
“Like a plant without water, without credit an economy cannot grow. Factor in chronic unemployment and epic political misjudgement on the need for fiscal unity and the European economy will remain in the doldrums for the rest of the decade,” says Cook.
And threats to the UK’s green shoots don’t stop across the channel, believes Deutsche Bank’s Buckley. Oil prices, weaker-than-expected growth in emerging markets and the US government’s intransigence at dealing with the debt ceiling effectively are all dangers to the UK. The pound’s rise during H2 2013 could also hit exports, adds Buckley.
However, as a shining light, UK businesses have found ways to keep the country’s credit moving. “A recent YouGov poll showed that one in three used funding routes other than banks in the search for finance while one in five of them secured backing from business angels or private investors, government or private sector loans, or crowd funding,” says Cook.
The CBI predicts that business investment will improve from -4.9% in 2013, to 6.9% in 2014 and 8.3% in 2015. “The recovery won’t be spectacular, just slow and steady, but it appears more solid and better-rooted. We’re also expecting business investment to pick up over the next two years and beyond, and net trade will begin to make a stronger contribution to growth,” says John Cridland, CBI director-general.
Not that companies need it, with the mountain of cash on which they are sitting – which they need to spend, says Turner. For the UK economy, it would be a big plus if the major UK companies were to start spending the £750bn they have “salted away” in bank accounts.
“There is a huge backlog of investment following several years of underspending but once the logjam is broken, investment could be the key to sustaining growth beyond the immediate short-term upturn,” he says.
Export and investment are also vital for a sustained recovery, agrees Gregory.
“Some of our key export markets outside of Europe seem healthier, and businesses tell us they plan to invest. However, we need to see these intentions turn into actions before we can be truly confident that the recovery has real, lasting momentum. If investment leads to employment growth and real wage gains, the UK economy will be in a much better position,” he says.
Deutsche Bank’s Buckley is also positive, and the bank is forecasting economic growth of 2.5% in 2014, due to improving export economies and expected rise in investment as credit becomes more easily obtainable. “With global growth strengthening and European uncertainty easing, the outlook looks positive,” he says.
Politics may still play a part, steering the UK in a completely different direction. While viewed from the outside as stable, the upcoming election and the cost of living could add some spice to ministerial decision-making.
“There is a potential to see increasing politicisation of business decisions and behaviour,” warns Gregory.
Despite the mixed messages thrown into the public domain, it is widely accepted that the UK is currently the strongest economy in the G10, with BoE governor Mark Carney claiming that the recovery has well and truly taken hold – and, at least for now, we can all rest assured that this is true.
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