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UK debt to soar to financial crisis levels over next five years

UK debt could rise to £6.7 trillion by 2023, from £5.1 trillion in 2017, according to new research.

The UK’s debt as a percentage of gross domestic product (GDP) is predicted to rise to nearly 260 per cent of GDP, a level not seen since the financial crisis.

The debt increase is expected to largely come from increased borrowing by companies and households, which are both predicted to borrow at a faster rate than economic growth, the analysis from accountancy firm PwC said.

The government is likely to reduce the size of its debt relative to GDP over the next five years, but even so, the net effect is set to be a gradual rise in the economy’s debt-to-GDP ratio from 252 per cent in 2017 to just under 260 per cent in 2023.

Total debt repayments could rise from a little above £150bn in 2017 to around £250bn by 2023 if interest rates rise two per cent.

Low income households could be hit particularly hard due to rising debt interest payments.

Chief economist at PwC John Hawksworth said: “While the financial crisis led to the private sector deleveraging, we’ve seen a change in behaviour among households and non-financial companies since 2015, when they began to accumulate debt at a faster rate than nominal GDP growth.

“The unusual amount of uncertainty facing the UK economy in 2018-19 due to Brexit, London’s stumbling housing market and the likelihood of further interest rate increases, means a pause in debt accumulation relative to GDP is possible in the short term.

“But if a smooth Brexit transition is agreed with the EU and UK business and consumer confidence recovers, the private sector is likely to resume faster rates of borrowing that could cause the debt stock to rise further relative to GDP.”

Source: City A.M.

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UK economy heading for worst year since crash, say economists

The British economy is heading for its worst year in almost a decade amid the growing risks from no-deal Brexit , according to a leading economic forecaster.

After official figures revealed zero growth in GDP in August, the EY Item Club said the economy would struggle to recover in the final months of the year owing to the increasing likelihood of Britain crashing out of the EU in less than six months time.

The group of economists, which is the only non-government forecasting organisation to use the Treasury modelling of the economy, said it had downgraded its growth forecast for this year and next as a consequence.

It forecast growth of 1.3% for the whole of 2018, down from a previous estimate of 1.4%. This would be the worst annual period for growth since the financial crisis. It also downgraded the outlook for the second quarter running.

EY Item Club forecast a modest recovery next year if there was a smooth Brexit deal, with growth of 1.5%, down from its previous estimate of 1.6%.
Economists have said failure to reach such a deal could significantly harm the UK economy, with the International Monetary Fund warning of “dire consequences” for growth.

The government’s economic forecaster, the Office for Budget Responsibility , last week raised the prospect of a no-deal scenario triggering border delays, companies and consumers stockpiling food and other supplies, and aircraft being unable to fly in and out of Britain.

The Item Club said Brexit uncertainties were influencing business investment decisions, but added that efforts to find alternative suppliers in the UK rather than the EU may lead to an increase in spending.

It also said weaker growth in the eurozone had sapped appetite for exports, as the world economy digests the impact of US import tariffs that have already begun to drag on economic activity.

Inflation is forecast to fall from about 2.7% to 2.3% by the end of the year, above the Bank of England’s target rate.

Consumer spending growth is estimated to remain limited as a consequence, as UK households remain under pressure from weak wage growth and relatively high levels of inflation.

Howard Archer, the chief economic adviser to the Item Club, said: “Heightened uncertainties in the run-up to and the aftermath of the UK’s exit could fuel business and consumer caution. This is a significant factor leading us to trim our GDP forecasts for 2018 and 2019.

“Should the UK leave the EU in March 2019 without any deal, the near-term growth outlook could be significantly weaker.”

Source: Gooruf

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GDP data shows mixed messages for UK economy

The UK economy grew faster than expected over the summer but appears to have juddered to a halt in August.

Data from the Office for National Statistics (ONS) released this morning, showed the economy grew by 0.7 per cent in the three months to the end of August.

Growth for June and July had been revised upward, but in August the first estimates suggest the economy did not grow at all.

Ben Brettell, senior economist at Hargreaves Lansdown, said the quarterly figure was better than expected but the data for August was a cause for concern.

He said: “Worryingly the dominant service sector has experienced a significant slowdown in growth over the past year or so, with an emerging trend for growth of around 1.5 per cent year on year.”

The ONS data came as the International Monetary Fund (IMF) revised downwards its projection for UK growth in 2018 to 1.1 per cent, having previously forecast it would be 1.3 per cent.

The IMF warned the UK’s public finances were among the worst in the world and, after compiling what was essentially a balance sheet for the UK economy,  said that on this basis the UK government had a negative net worth of more than £2trn.

Mr Brettell said: “Overall though the picture is still one of muddling through. Strong growth over the summer is likely to reassure policymakers that the recent interest rate rise was warranted, but they’ll be hoping to see the momentum maintained as Brexit approaches.

“Markets are still pencilling in a further rise around the middle of next year – though clearly a disorderly Brexit would pose a significant risk to that outlook.”

Jacob Dieppe, head of trading at Infinox, said: “The economy hasn’t given up the fight but it’s by no means firing on all cylinders. It’s somewhere in between and that will add to the uncertainty surrounding our exit from the EU.

“Optimists will see the August flatline as mere seasonal fall-out, cynics will see it as symbolic of a deeper malaise. What few will deny is that the disproportionate contribution of the services sector leaves the UK very exposed in the event of a fractious Brexit.

“If consumers sit tight, the rate of growth could quickly contract, all the more so if the Pound weakens further and drives up inflation.”

Source: FT Adviser

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Bill Jamieson: Continent counts the cost of ‘no-deal’ Brexit

Business pressure is growing on the UK to reach a deal with the EU on Brexit. From farmers to manufacturers, healthcare companies to banks and financial companies and SMEs to the behemoths of the CBI, the clamour is growing for the UK government to avoid a “no deal” outcome. All this is unfolding against the background of a sluggish performance by the UK economy and concerns over the lack of economic momentum –much of this blamed on the uncertainty caused by the relentless, debilitating lack of progress in securing a withdrawal deal.

Now Chancellor Philip Hammond has further racked up the pressure by repeating the findings of the Treasury’s provisional Brexit analysis earlier this year that a no-deal Brexit could mean a 7.7 per cent hit to GDP over the next 15 years, compared with the “status quo baseline”. He said that under a no-deal scenario chemicals, food and drink, clothing, manufacturing, cars and retail would be the sectors “most affected negatively in the long run”.

Let’s set aside the row over whether this is just a Remain-supporting chancellor regurgitating the earlier warnings of “Project Fear” which failed to materialise. We have much to be concerned about. And it adds to the sense that Michel Barnier and the European Commission negotiating team have nothing to lose by holding out and pushing the UK to the brink – and beyond. But we should also look more closely at what is at stake within the EU itself. For Brussels is under equal and equivalent pressure to agree a withdrawal deal.

The Eurozone economies, too, need to secure an agreement that minimises disruption to continental trade with the UK and wider negative effects. It’s generally assumed that the UK is the economic laggard, and that the EU, underpinned by the Single Market and the customs union, is enjoying a superior rate of economic growth and rising exports. But the latest figures suggest otherwise.

Eurozone economic growth slowed further in the second quarter of this year. Eurostat estimates that gross domestic product in the 19 countries sharing the euro, far from growing faster than the UK, is trailing our performance. It is grew by 0.3 per cent quarter-on-quarter in the April-June period, not only below analysts’ expectations but also slightly behind the 0.4 per cent growth recorded for the UK over this period.

The UK’s improvement on the first three months of the year has been attributed to the spell of warmer weather – though the Eurozone countries also enjoyed more clement conditions after the freeze of the opening months. Bert Colijn, a senior economist at ING Bank, said: “Trade uncertainty seems to have already had a significant effect on the Eurozone economy in Q2…

With lower confidence among businesses and consumers, concerns have likely translated into somewhat weaker domestic demand growth. In an economy in which capacity constraints abound and credit conditions remain favourable, confidence is the likely factor keeping investment down.” The Eurozone’s second quarter slowdown follows a sharp deceleration in the first three months of the year.

The combination of a slower global recovery and strong euro caused exports to plunge in the three months to March, with GDP growth falling from 0.7 per cent in the fourth quarter of 2107 to 0.4 per cent. Industrial production shrank in April and economic sentiment fell throughout the quarter. A stronger euro has taken a bite out of export growth, while rising inflation has been weighing on household spending – all too familiar here.

The euro area is also having to contend with political uncertainties – a fragile populist coalition in Italy, continuing turbulence in Spain, evidence of growing disenchantment with President Emmanuel Macron in France, while in Germany, Chancellor Angela Merkel has been under pressure from her coalition partners. Meanwhile, tensions with the United States, the Eurozone’s largest trading partner, are high following tit-for-tat tariffs implemented in June.

According to FocusEconomics, five Euro economies, including major players France and Germany, have had their growth prospects cut. Cyprus, Estonia, Greece and Luxembourg were the only economies to see higher GDP growth forecasts, while Belgium, France and Italy will be the slowest growing – all expanding below two per cent. Germany is forecast to grow by 2.1 per cent this year.

Latest data from France suggests the economy expanded modestly in the second quarter, while industrial production contracted for the third consecutive month in May – the fourth monthly decline so far this year. In addition, consumer confidence dropped to a near two-year low in June amid mounting unemployment fears. Consumers are growing more fearful that the economic recovery is running out of steam.

In Italy recent industrial output figures in April and May, and the average of PMI readings throughout the quarter point to a slowdown. Consumer spending also seems to have cooled, as retail sales contracted heavily in April and rebounded timidly the following month. If, as seems likely, world trade continues to slow as US tariffs continue to bite and President Donald Trump threatens more, the Eurozone’s leading companies will be anxious not to have their prospects further damaged by a “no deal” UK exit with all that this means for companies exporting to the UK.

Exports from the EU to the UK totalled £341 billion last year, with a surplus vis-à-vis the UK of £67bn. While the UK enjoyed a £28bn surplus on trade in services, this was outweighed by a deficit of £95bn in goods. Two EU export sectors look particularly exposed: cars and food products. German car makers have long warned that Brexit would hit their exports to Britain and disrupt international supply chains.

About a fifth of all cars produced in Germany are exported to the UK, making it the single biggest destination by volume. As for food and non-alcoholic drink imports from the EU, these are running at £24bn a year – trade which EU suppliers will be acutely anxious to protect. As the clock ticks on, I see intensifying pressure from business on both sides for a deal to be reached – and preferably with the minimum of delay.

Source: Scotsman

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Bank of England’s latest rate hike under microscope after UK GDP data released

The rebound in second-quarter UK growth was in line with Bank of England forecasts, but economists have raised questions over whether last week’s rate hike was justified.

While figures showed GDP rising 0.4%, economic expansion appeared to sputter in the final month of the quarter, growing just 0.1% in June.

“The second-quarter rebound was in line with expectations from the Bank of England, which raised interest rates for the second time in ten months at its August meeting,” said Chris Williamson, chief business economist at IHS Markit.

“Barring surprises, the Bank sees the economy growing at a steady 0.4% rate in coming quarters, but there are already signs that the third quarter has started on a softer footing,” he added.

He noted that recent purchasing managers’ index (PMI) readings covering the services, manufacturing and construction sectors are pointing to third quarter growth of just 0.3%.

“Not only did the PMI lose ground in July, but recent inflation indicators have fallen, hence fueling criticism that it may have been more appropriate to postpone a rate hike when genuine signs of the economy strengthening had appeared, rather than just a rebound from extreme weather,” he said.

But Howard Archer, chief economic adviser to the EY Item Club, said the reading “will likely be of considerable relief to the Bank of England”, as a weaker outcome would have fuelled criticism of the rate-setting Monetary Policy Committee (MPC).

“The Bank of England will likely see confirmation the economy grew 0.4% quarter on quarter and is back growing essentially in line with its perceived supply-side annual potential growth rate of 1.5% as consistent with its decision to raise interest rates from 0.50% to 0.75%.”

Mr Archer expects the Bank to wait until after the Brexit deadline of March 2019 to hike rates further, “given the major uncertainties that may occur in the run-up to the UK’s departure”.

The Bank of England currently expects full-year growth for 2018 to come in at 1.4%, rising to 1.8% in 2019.

“We expect the Bank of England to next raise interest rates from 0.75% to 1.00% in May 2019,” Mr Archer said.

“We would not rule out a second 25 basis points interest rate hike towards the end of 2019 as the Bank of England looks to gradually normalise monetary policy.

“However, the growth and interest rate forecasts could be blown out of the water if the UK leaves the EU next March with no deal.”

Source: BT.com

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A ‘no deal’ Brexit would cost UK economy dear, warns think tank

A “no deal” Brexit scenario would cost the UK economy at least around £800 per person in lost output each year, a think-tank has warned.

The National Institute of Economic and Social Research (Niesr) also estimates the cost to the economy of the UK crashing out of the EU could double the lost output if the impact on productivity is also taken into account.

It said the Bank of England will likely “weigh the consequences of ‘getting it wrong’” ahead of Thursday’s vote on whether to raise interest rates to the highest level for more than nine years amid uncertainty over a Brexit deal.

In our view, the Government will have to make significant concessions to the EU.

Niesr

Niesr predicts a hefty blow to the economy if the Government’s “more restrictive” White Paper proposals on Brexit are achieved – amounting to £500 per person in lost output per year over time, compared with the soft Brexit scenario.

But it said this would rise to £800 per person in the event of a “no deal” Brexit.

“These estimates do not include the likely impact on productivity which could, on some estimates, double the size of the losses,” it said.

In its latest set of predictions for the economy, Niesr said the Bank of England should only raise rates gradually and “stand ready to move in either direction should circumstances change”.

“The committee should emphasise the uncertainty (rather than the certainty) of its future policy stance in its communications and its willingness to reverse its decisions,” according to Niesr.

It is forecasting UK growth of 1.4% this year and 1.7% next year – broadly in line with its previous forecasts.

The predictions assume a “soft Brexit” scenario – where the UK achieves close to full access to the EU market for goods and services – and an increase in rates from 0.5% to 0.75% on Thursday decision, with rates hitting 1.25% in 2019.

Though it stressed the risks are heavily skewed to the downside.

Niesr said: “The UK economy is facing an unusual level of uncertainty because of Brexit.”

“The UK government’s White Paper, which set out its preferences for that new relationship, has failed to unite the Government or Parliament, leaving open an entire spectrum of possible outcomes,” it added.

Niesr also warned the Government would have to make “significant concessions” to the EU for its White Paper proposals put forward last month to succeed.

On spending, it said pressure to increase funding for the NHS and public sector workers will fail to see government spending as a share of GDP fall, in contrast to forecasts by the Office for Budget Responsibility (OBR).

The Budget deficit will therefore remain close to 2% of GDP over the next five years instead of the OBR’s forecast of 1%, according to Niesr.

Source: BT.com

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UK economic growth revised up in first quarter

UK economic growth has been revised up to 0.2% in the first quarter, as output from Britain’s construction sector came in higher than previously estimated.

Earlier readings of GDP by the Office for National Statistics (ONS) showed the economy grew just 0.1% – which would have been the slowest pace of growth in five years.

While the final reading means growth still halved from 0.4% in the final quarter of 2017, the slightly better measurement is likely to raise the prospect of a near-term interest rate hike by the Bank of England.

The ONS raised the figure in its final estimate after a notable upward revision in construction output, which mainly reflects improvements to the way the sector’s work is measured.

ONS head of GDP Rob Kent-Smith said: “GDP growth was revised up slightly in the first three months of 2018, with later construction data, and significantly improved methods for measuring the sector, nudging up growth.

“These improved methods, introduced as part of ONS’s annual update to its figures, will lead to better early estimates of the construction sector with smaller revisions in the future.”

Sterling rose against the US dollar in the wake of the data’s release (PA)

The pound spiked in the wake of the data, rising 0.7% against the US dollar to trade at 1.317. Versus the euro, sterling was nearly flat, at 1.130.

Construction output growth was revised up by 1.9 percentage points over the quarter to negative 0.8%, while production output was revised down by 0.2 percentage points to 0.4%.

Services sector growth was unrevised at 0.3%.

The ONS reiterated that the overall impact of extreme wintry weather caused by the Beast from the East on output in the first quarter “appears to be relatively small.”

The Bank of England’s Monetary Policy Committee (MPC) now be watched closely for hints that an interest rate rise may be pushed through sooner rather later, with some voting members having previously held off following the sharp slowdown in growth.

Howard Archer, chief economic advisor at EY ITEM Club, said the upward revision to GDP, as well as the recent evidence of a pick-up in retail sales in the second quarter, “fuels our belief that the MPC is more likely than not to hike interest rates from 0.50% to 0.75% at their August meeting.”

“There is likely to be only one interest rate hike in 2018, leaving interest rates at 0.75% at the end of the year.

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“We expect the Bank of England to raise interest rates twice in 2019 taking them up to 1.25% as it looks to gradually normalise monetary policy.”

Other ONS data showed the squeeze on living costs triggered by the collapse in the pound following the Brexit vote is easing.

Real household disposable income in the first quarter increased by 0.3% quarter on quarter, as wages increased at a faster rate than price rises.

It represents the second consecutive quarter of positive growth following over a year of negative growth.

However, the household saving ratio fell 0.4% to 4.1% as spending grew faster than income, the third-lowest quarterly saving ratio since records began in 1963.

Business investment was estimated to have fallen by 0.4% to £47.7 billion between the fourth and first quarter

The UK’s current account deficit was came in £17.7 billion, below forecasts of £18 billion, a narrowing of £1.8 billion from a revised deficit of £19.5 billion in the previous period.

Source: BT.com

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Brexit: why the UK economy hasn’t led to buyer’s remorse

We’ve all been there: that moment when you get home and realise you didn’t want that new jumper and couldn’t really afford it either. It is known as buyer’s remorse, and it was a concept that gave the remain camp comfort as it reeled from the shock of defeat in the EU referendum vote in June 2016. In the context of Brexit, buyer’s remorse meant that people who had voted to leave would quickly regret what they had done because the economy would plunge instantly into the stonking recession predicted by the Treasury in the run-up to the plebiscite. Project Fear was actually Project Reality, it was said, and before too long Brexit voters would be clamouring for the chance to think again.

No question there were those in the remain camp who, despite the obvious flaws in the European project, genuinely thought nothing good could ever come of Brexit and it would be the poor and the vulnerable who had voted leave who would suffer most from what they saw as its inevitable baleful consequences. There was, though, a snobbish and nasty subtext to the buyer’s remorse theory, which was that the plebs were too dumb to know what they were voting for.

Yet it was always a long shot that a second referendum would come about by these means and so it has proved. Eighteen months on and there has been little sign of buyer’s remorse.

In part, that is because people voted remain or leave in the referendum for complex reasons. The referendum was never just about economics, and in retrospect it was a strategic blunder on the part of the remain camp to fight only on what the vote would mean for GDP per head and house prices.

Another reason why buyer’s remorse has not set in is that the country – or rather the part of the country (by far the bigger part) that is not obsessed with Brexit – has moved on. There are Brexit fanatics, there are remain fanatics, and in between there are millions of people who were asked for a decision in June 2016, made it and now expect democracy to take its course. They have switched off from Brexit in just the same way that they switch off from politics between general elections.

But buyer’s remorse strategy required the UK to fall into recession and it has not come remotely close to doing so. The economy’s performance has been lacklustre – especially in comparison with other major developed countries – but buyer’s remorse would have required the economy to contract sharply and for unemployment to rocket. Something equivalent to 2009 – when the economy shrank by more than 4% – might have done the trick. Instead of which the economy is growing slightly below its long-term trend and unemployment has fallen to a 42-year low. The absence of economic Armageddon has simply reinforced the lack of trust in expert forecasters.

The stickiest patch for the economy since the referendum was in the first half of 2017, when inflation rose sharply as a result of the depreciation of the pound triggered by the Brexit vote, and even then growth averaged 0.3% a quarter. Since then, things have picked up a bit and, with inflationary pressures abating activity, is likely to remain reasonably firm in 2018. Expectations for the global economy are being revised up and that will help UK exporters of both manufacturing goods and services. Some of the exuberance in stock markets is froth, but one thing can be said with confidence: 2018 is not going to be another 2009. The tide turned for the global economy around the time of the Brexit vote and the upswing will continue for some time yet.

There are a few reasons for the changed mood. Prolonged stimulus in the form of record-low interest rates and the money-creation process known as quantitative easing has been one factor. Another has been the improved financial position of the banks. A third has been the natural rhythm of the business cycle, which means that even cautious firms have to start investing because their existing equipment packs up or becomes obsolete. For all these reasons, animal spirits started to revive. Firms that had made it through the Great Recession decided that things were going to get better rather than worse. They got fed up with being fed up.

This does not mean that the world has been magically transformed and that all the problems that have dogged the past decade have magically gone away. Far from it. Those deep structural problems – the over-reliance on debt to support consumption, a lost decade of productivity growth, growing income inequality – have not gone awayand are merely being disguised by a strong cyclical upturn. A period of solid growth creates a more benign climate in which some of those weaknesses can be addressed. It remains to be seen whether the opportunity is taken.

That is particularly true of Britain where the big story of the past decade has been dismal productivity. Had growth in output per head since 2008 continued on its pre-recession trend, living standards would be about 20% higher by now. Not even the most pessimistic predictions for the long-term impact of Brexit expect it to be that costly.

All of which brings us to the final problem with the buyer’s remorse theory: its proponents have spent so much time banging on about how terrible Brexit will be that they have neglected to come up with any solutions for tackling the reasons people voted for Brexit in the first place: low wages, job insecurity, the feeling that they were not being listened to. Remainers have latched on to any piece of negative economic news – no matter how trivial – in the hope that this will lead to change of heart among leave voters. But they have struggled to sketch out a plan for dealing with Britain’s structural economic problems, which were there before 23 June 2016 and will still be there whether or not the referendum result is overturned.

Constantly accentuating the negative without coming up with any solutions to Britain’s chronic balance of payments deficit, its north-south divide and its reliance on debt-fuelled growth has helped create the impression that some remainers would welcome a stiff recession because it would bring voters to their senses.

Remainers do themselves no favours when they over-hype the bad economic news. They may be better off pointing out that the part of the global economy that most outperformed expectations in 2017 was the eurozone and that Mario Draghi has done a brilliant job as president of the European Central Bank in disguising the single currency’s innate flaws. The UK economy will do better than expected in 2018. That it will do better partly as a result of a stronger eurozone is one of life’s ironies.

Source: The Guardian

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Higher interest rates could hit Britain’s vulnerable economy

IN A meeting room on a cold autumn day, the governor of the Bank of England settled into a witness chair to give evidence to a group of MPs. Worries were mounting about the economy. GDP growth was slowing and households were highly indebted. Nonetheless the Bank of England began raising interest rates. The governor told everyone to relax. Concerns about a “Christmas debt crisis” caused by higher rates were overblown, he said: “People have exaggerated the vulnerability of the economy to likely changes in policy.”

That was in 2003, when Mervyn King was the bank’s governor. For the first time since then, and under a different boss, Mark Carney, the bank is expected to start raising interest rates once again, after a long period of inactivity (see chart). Inflation is 3%, well above the bank’s 2% target. GDP grew by 0.4% in the third quarter, above expectations. As in the early 2000s, members of the bank’s monetary-policy committee (MPC) are coming round to the view that tighter monetary policy will have a benign effect on the economy. Are they right?

By raising or cutting the benchmark interest rate, the MPC influences the rate at which high-street banks can borrow—and, in turn, the borrowing costs faced by households and firms. In the post-war period it averaged around 6%. Yet during the crisis of 2008-09 the bank slashed it to stimulate the economy. It was cut again after last year’s Brexit referendum, to 0.25%, the lowest on record. Most economists believe that on November 2nd the MPC will change direction and raise it to 0.5%.

The reaction of the economy as a whole to tighter policy will be largely shaped by how households respond. Their spending accounts for some 60% of GDP. At first glance, Britain’s households look prepared for what is to come. True, the stock of household debt (mortgages plus consumer credit) is nearing 140% of income, which is high by historical standards. Higher interest rates would result in higher payments for those with debts. They would have less money left over for everyday expenses.

However, many Britons would also earn more interest on their savings, which are worth around 120% of income. That would give them more spending power. A rise of 0.25 percentage points in the base rate, passed on fully to savers and borrowers, would cost less than 0.1% of incomes. No big deal.

Yet such a calculation understates the probable impact of higher interest rates. For one thing, the circumstances are unusual. The bank’s “inflation-attitudes survey” suggests that when it has tightened monetary policy in the past, the public has inferred that further rises are on the way. The bank has tried before, and failed, to forestall such a reaction. The last time the MPC raised rates, it stressed that “no immediate judgment was being made about the future path of rates.” No matter: subsequently, a big majority of the population thought that further rises were likely.

The public’s reaction is especially hard to predict this time around. Interest rates used to go up and down frequently. Today, after a decade with no rate rise, many adults are familiar only with the Bank of England cutting the cost of borrowing. If people start to worry that their incomes will be squeezed more tightly still in the coming months, then consumer confidence and spending could fall by more than the MPC expects.

The effects of higher interest rates will also be unevenly felt across households. Some have plenty of savings, others have big debts. Few have both. Data on the distribution of assets and liabilities are poor. What evidence there is, however, makes for uncomfortable reading.

One worry concerns those who would benefit from higher interest on their savings. Income-bearing financial assets are unequally distributed. Such inequality also runs along generational lines. What will the wealthy do with the extra income from their savings? People with large pots are by definition squirrellers, not splurgers. Retirees have a recent additional incentive to save any windfall. The inheritance-tax regime is becoming increasingly generous: by 2020 a couple will be able to leave £1m ($1.3m) tax-free to their children, if it includes their house, up from £650,000 last year. All this suggests that the boost to savings from higher interest rates is unlikely to translate into much extra spending.

Owe dear

On the other side of the equation, households with heavy debts may struggle with higher rates. Britain’s pile of mortgage debt is concentrated among far fewer households than it was a decade ago. Prospective buyers have to stretch to get a foot on the housing ladder. Since 2012 the average mortgage for a first-time buyer has equalled 3.4 times their income, up from 2.6 times at the turn of the millennium.

Many have locked in low rates on these mortgages with fixed-rate products. Such deals typically last for between two and five years, however, not the 30 years that is common in America. And of all outstanding mortgages, roughly 40% are on variable rates. Our analysis suggests that, because mortgages have become so hefty, a given interest-rate rise would ultimately result in a bigger squeeze on recent homebuyers’ income than at any other time on record.

Poorer Britons could also suffer. Lately the rate of personal insolvencies has risen, in part because of tough welfare policy and falling real household incomes. Those whose incomes have been squeezed often rely on short-term loans to tide them over. If the cost of repayment rises, more might struggle. Indeed, a survey in the bank’s latest inflation report found that, after a hypothetical decline in real incomes, “households who would reduce real spending the most tended to have fewer savings and be more concerned about their debt.”

Whatever happens next week, rates will remain low, meaning that monetary policy will continue to favour borrowers over savers. But in shifting the balance, the bank must tread carefully. It has signalled that interest rates will rise only at a snail’s pace—perhaps 0.25 percentage points every year. A more rapid increase could prove to be an unwelcome jolt.

Source: The Economist

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Bank of England under pressure for interest rate rise after ONS error

The UK’s official statistics agency has added to the pressure on the Bank of England over whether to raise interest rates as soon as next month after admitting it underestimated the pace of rising labour costs.

The Office for National Statistics said on Monday it made a mistake in its original calculations for the growth in unit labour costs, which is the price paid by employers to produce a given amount of economic output. The measure stood at an annual 2.4% in the three months to June, as opposed to the 1.6% initially published by the country’s official statistics body on Friday.

The revision could indicate momentum for wages in the UK, which is a factor under close observation from Threadneedle Street, as it looks to raise interest rates for the first time in more than a decade. Rising labour costs could indicate economic strength and justify a rate hike.

Howard Archer, the chief economic adviser to the EY Item Club, said the change “may facilitate” a November rate hike by the Bank. The cost of borrowing could increase from 0.25% to 0.5% should the monetary policy committee decide the economy is able to withstand the increase.

Despite the positive signal for the economy, there have been numerous readings to paint a much weaker picture. The construction sector is reporting signs of a slump, while the Organisation for Economic Co-operation and Development – a thinktank for developed economies – has warned that UK growth will slow next year.

Analysts at the Swiss bank UBS said on Monday a rate hike could also “exacerbate” potential headwinds for the UK economy generated by the Brexit process. “We think there is a strong case for erring on the side of caution,” they wrote.

Despite the lowest levels of unemployment since the mid-1970s, wages for British workers have failed to rise above the rate of inflation. Pay growth is rising nonetheless, although it lags behind a spike in the cost of living from the increasing cost of imports linked to the weak pound.

While the increase in unit labour costs potentially indicate an increase in wages for British workers, the increase could have been driven by non-wage elements such as taxes and pensions contributions paid by employers. This would weaken the ground for increasing rates, according to economists at Barclays.

However Mark Carney, the Bank of England governor, has previously said that rising labour costs could pave the way for a rate rise. Speaking over the summer, he justified the reluctance of the monetary policy committee to increase rates due to “subdued” wages and labour costs.

The ONS apologised for the error, saying it was a consequence of income data from the second estimate of GDP being using instead of data from the quarterly national accounts. “We have corrected this error,” the organisation said.

Source: The Guardian