Friday, 9 August 2013

UK Economy finally on the mend or is this just a temporary respite?

The temperature is not the only thing on the increase at the moment – news articles and media coverage are very keen to report that finally, it would seem the UK economy is on the up. The Chancellor of the Exchequer couldn’t wait to give us the news back in July of a 0.6% increase in our Gross Domestic Product informing the world at large that the UK economy was “out of intensive care”.

This week reports of an increase in food and clothing sales, not to mention our manufacturing sector recording a growth spurt, means you could be forgiven for thinking that the days of nursing your finances are over and everyone can breathe a little easier from now on.

Even high street banks are keen to get in on the act and have poured millions into the high cost consumer credit industry of payday loans to help separate us from our hard earned cash. Although before we start putting out the banners and welcoming the patient home from the hospital there are a few pertinent points to consider.

Don’t blame it on the sunshine. Or should we? 

First of all the increase in retail sales over the summer months, goods that flew off the shelves were not surprisingly, summer clothing and food sales particularly those related to outdoor cooking and eating. The unusually hot spell of weather that has lasted more than the three days of summer we enjoyed last year has been an absolute boon for the barbeque and picnic connoisseur. In the UK once the sun appears we know how to make the most of it before temperatures start to drop.

Secondly, the spending is not necessarily a result of consumer confidence returning or a matter of people having extra cash and disposable income in their pockets. In reality our wages have not increased, government cuts and austerity measures are biting deep so people, if they have a little savings, are having to dip into them to pay their way. We have had a few “feel good” factor events over the past couple of months particularly on the sporting scene and this all contributes to some extra cash finding its way back into the economy.

Thirdly, there has been a pot of money coming straight back to consumers from the banks who had put aside millions to cover compensation costs for mis-sold PPI. Recent reports from the banks indicate that they feel they have just about addressed their mis selling. This extra disposable income therefore could soon be coming to an end. All of these factors are not sustainable, the weather will get worse, savings will dwindle and some day we will even perhaps have to hand back the Wimbledon Trophy and the Ashes. What we will have to sustain us, according to the announcement from Mark Carney, the new Governor of the Bank of England, is the knowledge that for the moment, interest rates will be kept low until unemployment reaches below a certain figure – in this case 7%. Good news for those paying off interest on their mortgage but not good for those who have their money invested in savings accounts.

Consumers still need to keep their fingers on the pulse 

 High Street banks as well could be encouraged by this news and the new policy of “forward guidance” from Mr Carney where he sets out to make a promise about future interest rates. This may encourage the banks to borrow from the Bank of England at a rate of less than half a percent – which then gets passed onto to the public at a proportionately low rate or so we would hope. (At this point the health warning on the packet should point out that Mr Carney has broken his forward guidance promise in the past and that interest rates can rise as well as fall.)

Whilst welcoming any positive news of a recovery I would still like to see this economy able to stand firmly on its own two feet and not just be propped up with a temporary walking frame of seasonal sales and transient cash injections. I have made my diagnosis – now looking forward to hearing yours!


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