View the article online at http://citywire.co.uk/money/article/a604391
Week Ahead: a brief let-up for Britain’s economy
We preview the main financial events of the coming week: the forecast is for showers, with a brief spell of sunshine.
No weakening in Britain’s jobs market, a decline in inflation as pump prices fall, and a decent increase in shop sales; the sun will shine through the clouds over Britain next week, with a string of relatively upbeat economic figures. But the brightness will be fleeting.
The UK economy has been flat for two years now, the life sucked out of it by weak global demand, domestic spending cuts, above-target inflation, a lack of investment and consumer retrenchment. A return to the growth seen before the downturn, back in 2008, is not expected until 2014.
Why has the jobs market been so ‘cheery’?
Figures on the labour market, due to be published on Wednesday, are expected to be mixed. Unemployment – particularly for younger people – has grown sharply in the recession to 8.2%.
But economists are baffled that it hasn’t been worse. This may be the slowest economic recovery in the past 100 years, but the unemployment level is lower than in other recent recessions. Mike Amey of bond manager Pimco even described this, relatively speaking, as ‘reason for cheer’.
Added to that conundrum is a parallel decline in investment by often cash-rich British companies, which is not only way below pre-recession levels, but also much weaker than in most of Europe. Why won’t they would spend more? The obvious answer is a lingering weariness over the broader economic outlook.
But economists at Citigroup tie the fate of the relatively resilient labour market to the lack of business investment. In times of uncertainty, if they are to expand at all, companies opt for flexible schemes that they can scale back quickly if need be. Labour comes easily and flexibly – in fact it has got cheaper in recent years – while at the same time the tax treatment of investment has become less favourable. Your average hard-nosed exec in a UK-based multinational is going to take their chances on hiring a few extra staff.
Will this shift to a more ‘labour-intensive' (rather than capital-intensive) structure continue? It depends on whether wage growth stays weak – it’s expected to have been muted in May, with figures due on Wednesday – and whether the strength of the pound stays low, not to mention the broader economic outlook. The International Monetary Fund’s world outlook, due on Monday, could provide more clues here.
Hooray for an abating inflation squeeze
This is all tied closely to the rate of inflation.
Still above the Bank of England’s 2% target, the rate of consumer prices inflation (CPI) has been coming down since peaking at 5.2% in September last year. The CPI reading, the government’s inflation measure of choice, is expected to have ticked down again in June to 2.7%, a 31-month low.
The figures, to be published on Tuesday – after the Office for National Statistics has sent staff to collect 110,000 prices for 560 items – will have been dragged lower by declines in the price of oil, which have led to cheaper transport prices. Food prices have also fallen.
The decline helps consumers, and is feeding through to better retail sales (with figures for June due on Thursday), while also giving the Bank’s monetary policy committee (MPC) the leeway it needs to extend its recession-fighting quantitative easing (QE) scheme, which is inflationary.
The gilt-buying scheme was extended by £50 billion earlier this month, and minutes of the meeting in which the nine-man MPC approved this extra fire power, to be published on Wednesday, could provide clues as to what to expect next.
News sponsored by:
After Boris announced he was backing Brexit, sterling suffered its biggest slump in six years. Our Market Mavens discuss. Follow the Market Mavens LinkedIn page for weekly videos, in which our panel of industry experts share their views on financial news
The Citywire guide to investment trusts
In association with Aberdeen Asset Management
More about this:
Look up the fund managers
Tools from Citywire Money
From the Forums
Weekly email from The Lolly
Get simple, easy ways to make more from your money. Just enter your email address below
An error occured while subscribing your email. Please try again later.
Thank you for registering for your weekly newsletter from The Lolly.
Keep an eye out for us in your inbox, and please add firstname.lastname@example.org to your safe senders list so we don't get junked.