Directly after Brexit consumer confidence boosted the UK economy, the Bank of England cut interest rates for the first time since 2009, from 0.5% to 0.25%, and wage rates grew.
The better than expected upturn, which gave a 1.8% growth to the economy after the referendum, now seems to be reversing.
Economic growth is stalling, prices are rising, and wage rates are stagnating.
Consumers are suddenly saving less, just 1.7% of disposable income for the first quarter of 2017. Down to a just a third of what it was just 12 months ago.
Savings rates are the lowest on record, having sat at an average of 10% since the early 70’s.
Incomes adjusted for inflation have declined for the past nine months, stagnating wages. Real household income fell by 1.4% for the first quarter of 2017.
Combined with the consumer price inflation increases we have seen since 2012, the CPIH inflation rate now stands at 2.7% in May, up from 2.6% in April 2017.
This all means that consumers are experiencing a tightening of living standards not seen since 1976.
Economic growth is now at 0.2%, lower than any of the G7 nations.
Consumers are saving less, but also borrowing more. In fact, £300m more was borrowed than expected in May, as consumer credit hit 1.7bn for the month.
This fact that this credit has not been transferred into additional consumer spending is a worrying sign.
Will interest rates increase?
Rumours abound of an interest rate increase.
A vote by the Monetary Policy Committee to raise interest rates back to 0.5%, led to speculation the rise could happen by August.
However, the voting by the committee is currently 3/8 against. Those in favour of an interest rate rise would need to increase to 6/8 for it to actually happen, and this is currently unlikely with Governor Mark Carney voting against the rate hike.
The falling pound, growing consumer debt, and rising inflation are all contributing to the shift in favour.
However, more recent figures illustrating the economic downturn, low wage growth, tightening of living standards, and low domestically generated inflation, may actually prevent an interest rate increase.
Two other viewpoints exist.
The Committee could look to reverse the emergency reduction of interest rates from 0.5% to 0.25% last year. Branding the return to 0.5% as an adjustment of the previous temporary measure, rather than a hike.
The second school of thought is the currently high consumer price inflation of 2.9% (CPI) is just a temporary blip. This figure is well above the Monetary Policy Committee’s goal of 2%, and the thinking is that inflation could soon fall over the next 12 months due to the downturn.
It’s even possible that these factors result in another interest rate reduction to boost the economy.
With such low interest rates already, a fall could hit a paltry 0.1%, but it seems unlikely to fall below this to a negative interest rate scenario.
Is it all Bad News?
It’s not all bad news for the economy right now.
The services sector, which makes up 79% of the economy, showed a small increase in April. Which, at such a high proportion of our economic pie, could positively impact GDP in for April-June.
There has been concern about the housing market, and London prices fell 1.2% in the 2nd quarter. But, June figures do show a growth in house prices; they are up 1.1% for the first time in four months.
(Sources: Nationwide, ONS, CBI)