View the article online at http://citywire.co.uk/money/article/a534688
Rebooting the UK economy: the options remaining
‘Monetary and fiscal policy in the United Kingdom can only do so much,’ Mervyn King said last night. But is the UK really out of options?
‘Monetary and fiscal policy in the United Kingdom can only do so much,’ Bank of England governor Mervyn King said last night. But is the UK really out of options?
An economy off the rails
As King said, the UK economy has ‘gone off track’.
Domestically there aren’t enough jobs, and those people who are employed aren’t seeing their wages rise – or certainly not enough to keep up with rising inflation, which shot up to 5.2% on the CPI measure in September.
Rising inflation means that savers and investors are hard pressed to prevent their money losing its value. Inflation will fall back, but until it does it remains particularly painful for pensioners who depend on a regular income. Nor are annuity rates doing the retired any favours, worsened by the impact of quantitative easing.
Those who have yet to buy an annuity, such as people nearing retirement age, will see that pension schemes are increasingly falling into deficit as stock market declines take their toll.
Meanwhile, the pressure on households grows. Utility companies, in pursuit of record profit margins, will stretch household budgets to their breaking point over the coming months with their double-digit price hikes.
None of this is good for consumer confidence, which has resulted in less spending on the high street, where sales figures have been fairly flat. The embattled retail sector now also says it faces a £350 million jump in bills next year as a result of yesterday’s inflation reading.
The only really good news for consumers, according to Howard Archer of IHS Global Insight, is that the Bank of England is clearly not going to raise interest rates for a long time. Great for borrowers, but savers are subsidising them.
This is framed by the European, and global, crisis, which poses a threat to UK exporters, and makes for poor-performing financial markets. Here though, there has been some good news, with Office for National Statistics figures showing that exports by UK companies rose to £25.5 billion in August, the most since (comparable) records began back in 1998.
Economists are doubtful that will last though. So much depends on European leaders’ ability to fix the eurozone crisis, with this weekend’s summit a potential turning point.
This uncertainty, coupled with weak domestic demand, means that UK business investment remains below its pre-Lehman peak, according to a report from Ernst & Young’s respected ITEM Club economists today.
During all of this, politicians and policymakers have embarked on a scorched earth policy, seemingly unleashing the entire economic arsenal. What is left to them?
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