UK Economy Looking "Pretty Mediocre"

After a week heavy on economic data, we digest the positive and negative voices on the outlook for the UK economy.

David Brenchley 16 November, 2017 | 2:17PM
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Negative real wage growth and higher interest rates are combining to limit consumer spending in the UK.

After a triumvirate of economic data published this week, it seems a good time to assess the state of the UK economy as we chug towards the year-end.

The week began on Tuesday with numbers showing inflation was steady in October at a five-year high of 3%, while Wednesday’s wage growth figures of 2.2% showed that real income remains in negative territory.

Then retail sales data, released Thursday, showed that consumers are feeling the squeeze. October’s 0.3% fall in sales was the first annual decline since 2013. It comes as no surprise – retailers have put in some underwhelming trading updates recently.

Add in the spectre of rising interest rates and the UK economic picture looks “pretty mediocre”, says Ben Brettell, senior economist at online investment platform Hargreaves Lansdown.

With interest rates at a historic low of 0.25%, many have been taking advantage of cheap credit in order to keep spending, notes Ian Forrest, investment research analyst at The Share Centre. With every possibility rates will hit 1% by end-2019 “the cost of borrowing may reduce the appeal of that method of funding”.

Fahad Kamal, senior markets strategist at wealth manager Kleinwort Hambros, agrees. He says the interest rate rise is the Bank sending out a “very strong signal to consumers that unlimited borrowing is not good”.

One can view the prints through a more positive lens, however. Brettell points out that the retail sales data is better than expectations of a 0.6% decline. Kate Davies, senior statistician with the Office for National Statistics, adds October 2016 was “very strong” for sales.

Wage growth, at 2.2% in the three months to the end of September, has now been negative in real terms for the past seven months. But others will point to unemployment statistics as a reason to be bullish on the outlook for the UK economy. The number of jobless fell to 59,000 and the unemployment rate held steady at 4.3%, still at low levels not seen since 1975.

Many are underwhelmed by the prospects for the UK economy. Kamal says that, all else being equal, falling consumption is inevitable. “You can’t have people getting a real pay cut and for them to continue to consume as much as they do.”

There are some positive voices, though, not least fund managers Mark Barnett and Neil Woodford. Woodford points out predictions are for wage growth to improve in 2018. He also makes the point that real wage pressure is actually occurring in higher-income deciles.

“People in lower-income deciles, who have a higher propensity to spend, have seen good real wage growth since the vote to leave the European Union,” he says.

That’s potentially been borne out in figures from Primark, the fashion retailer offering cheaper goods than the likes of Next (NXT) and Marks & Spencer (MKS). “Primark has so far defied the gloom with good sales in the UK, which may reflect its focus on offering value products,” said Forrest.

Attention will now turn to the Budget on Wednesday for more of a sense of predictions for the UK economy going forward.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Associated British Foods PLC2,468.00 GBX-0.80Rating
Marks & Spencer Group PLC298.00 GBX-1.75Rating
Next PLC9,140.00 GBX0.42

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David Brenchley

David Brenchley  is a Reporter for

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