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Optimism on the Horizon: Positive Trends in the UK Economy

UK houses

It was another busy week for the UK economy in which we got fresh data on inflation and another interest rate decision from the Bank of England.

Before asking where it all leaves the UK economy, its worth a quick recap.

  • On Wednesday, inflation fell to 3.4 per cent thanks largely to falling food prices. This was slightly lower than the 3.5 per cent expected by economists. Services inflation also fell, but remained elevated at 6.1 per cent.
  • Before the Bank of England met on Thursday, S&P‘s closely watch purchasing managers’ index (PMI) showed the UK economy continued to expand at a “robust” pace in March, albeit at a slightly lower pace than February. However, cost pressures for firms were also still high.
  • The big event. As expected the Bank of England left interest rates on hold, but hawkish dissent on the Monetary Policy Committee (MPC) dissipated. The statement said policy would remain restrictive even after rates were cut. A June start date looked increasingly likely after the decision.
  • Finally a health-check on the UK consumer. Consumer confidence stalled in March, remaining at its February level, while retail sales volumes were flat month-on-month despite a very wet month.

The UK economy, rightly or wrongly, is driven by consumption. With regards to consumption, most economic indicators turned markedly more positive at the start of the year. For example, consumer confidence hit a two-year high in January; retail sales rebounded robustly from a poor December; and the PMI hit a nine-month high in February.

This week’s surveys suggest that the economy has maintained its early momentum, even if it has not yet been able to take off to a new level.

However, this week gives us two very good reasons to think that things will continue getting better.

First, inflation. Most economists think inflation will be back to target by April thanks to Ofgem’s energy price cap, although there is some debate about where it will then pick back up again later in the year.

Wage growth meanwhile remains fairly hot, even if it too is on a downward trend. If prices continue rising slower at a slower pace than wages, then people will have more money to spend and momentum will continue building.

This will only support consumer spending.

The second factor is interest rates. We got our surest signal yet that interest rate cuts are on the way with a June cut now looking more likely than not.

This has already started feeding through into lower mortgage rates and will continue to do so as the year progresses.

Economists argued lower inflation and falling interest rates would support consumption in the year ahead.

“We think the stars are aligning for stronger consumer spending growth this year,” Rob Wood, chief UK economist at Pantheon Macroeconomics said.

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Similarly, Ellie Henderson, UK economist at Investec said “brighter days are ahead for the UK consumer”.

By Chris Dorrell via CityAM

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