Chief Economist’s Weekly Briefing – Stubborn

bank of england.jpgThe Bank of England is debating the best way to tackle the UK’s current dose of inflation. But for the central banks of the Eurozone and the US the issue is stubbornly low inflation.

Urgent: improvement required. GDP data for Q2 confirmed the economy expanded by 0.3% from Q1. It’s not a great performance and leaves the UK languishing at the bottom of the G7 economy growth league. Weaker growth in household spending (made worse in Q2 by car purchases being brought forward into Q1 ahead of changes to vehicle excise duty) is, so far, not being offset by improved investment and trade. And while the economy is almost 10% larger than its pre-crisis peak, GDP per head is a mere 2% larger. Already paltry, growth in this measure is within a  whisker of stagnating.

Running away?  The inflation measure contained within the GDP release, which is more comprehensive than the monthly consumer price index, showed growth of 2.1% in Q2. That’s the second straight quarterly fall and the lowest figure in a year. The reading should calm the fears of those concerned that the current bout of inflation is something more serious and long-lasting. It might even go some way to dissuading those calling for a hike in interest rates.

Celebrate! It’s 20 years since the Bank of England was granted independence to set Bank Rate. Inflation has since averaged just under 2% compared with over 6% in the preceding two decades, a significant achievement. Does that matter? Younger readers won’t be familiar with high and volatile inflation and the damage it does to employment and output. Inflation was a curse on the UK for decades and a credible inflation targeting regime and an independent central bank have consigned that to the past. So far.

Money talks. But it don’t sing and dance and it don’t walk. Channelling his inner Neil Diamond, Mark Carney noted that monetary policy can control inflation but isn’t a cure for all ills. Different tools are needed to prevent a crash like that of a decade ago. Today, adjusting to the world after Brexit will involve people, and physical and financial capital moving from what they do now to what they will do in future. Monetary policy can smooth bumps on the road but no more than that.

Too low for longer. While the Bank of England is above its 2% inflation goal, inflation in the eurozone is a bit short of its ‘close to but below 2% target’, remaining unchanged at 1.5% y/y in September.  A strong currency isn’t helping the ECB’s cause. And the core rate, which strips out volatile items such as food, fuel and tobacco eased from 1.2% in August to 1.1%. The ECB may not be able to withdraw its monetary policy stimulus as quickly as it would like.

Drifting away. The Fed’s preferred measure of inflation (PCE Core) started the year within a whisker of its target at 1.9% y/y. Since then it has drifted lower. August’s reading of 1.3% marked the weakest rate of inflation in almost two years. Meanwhile US personal spending and income growth eased in August too due to the impact of Hurricane Harvey. A further interest rate hike this year may not be the slam dunk people previously thought.

Back to earth. Growth in UK consumer credit has garnered plenty of attention of late. The Bank of England’s Financial Policy Committee last week  warned banks that they were underestimating how much of the debt could go bad if the economy went into recession. So it will be a relief to many to see cooler growth. It’s not happening overnight, credit card debts are still growing at 8.6%, but we seem to be past the peak. Personal loans and car finance show a similar trend. With rising interest rates back on people’s minds we should expect that slowdown to continue.

Less precarious. UK household finances got an upgrade from the Office of National Statistics last week.  A new methodology meant that households are now being credited with much higher dividend income than previously thought, worth around £50bn in 2016. That’s helped reduce the extent to which spending growth was exceeding income growth, meaning the saving ratio is actually higher and falling more slowly than we feared. It’s not a big enough adjustment to offset the full force of the income squeeze affecting consumers, but at least it’s a step in the right direction.

Work/life balance. While raising children often feels like a full time job, the secret behind the UK’s record employment has been the rise in working parents. Since 1996 the employment rates for non-parents have remained broadly stable. Yet the rate for mothers has jumped from 63.1% to 73.7% and from 87% to 92.4% for dads. Fatherhood motivates men. Across all ages dads are more likely to be working than non-dads. The same is not true for women under 50. The stereotypical family in 2017 Britain is where dad works full time and mum works part time

Leave a Reply