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UK's negative signs.


Bank of England governor Andrew Bailey admitted last week that the economy was already in a recession.

That would be the most protracted recession in 100 years. The Bank’s target is to keep inflation at 2 per cent, but the current rate of just above 10 per cent is five times higher. While much of the surge in the cost of living is being caused by global effects, including Russia’s war in Ukraine, which has pushed up the prices of energy and some food staples, there are domestic forces at play too. The labour market could remain tipped in favour of workers if firms hoard the staff they have worked hard to hire since Covid restrictions were eased.

But, the Bank said, the market could also go the other way. «Demand for staff is reported to have fallen quite sharply in some business surveys, and some indicators of vacancies have declined from their earlier peaks,» the Bank said. An Over-50s Lifestyle Study from the Office for National Statistics found that 65 per cent of workers aged 50 to 59 would consider returning to work to support their incomes. A key reason why the Bank is watching the jobs market is its impact on pay.

When there is demand for workers, people have more bargaining power and can push up wages. Total pay increased by 6 per cent in the three months to August and the Bank expects it to keep rising in the months ahead. Even so, at 6 per cent, wages need to catch up with inflation. In addition, some 30 per cent of households have a mortgage, and many face higher repayments after big moves in expectations about the future rise in the Bank of England’s base rate.

This was increased by three-quarters of a percentage point to 3 per cent last week, and the financial markets envisage that the base rate will peak at 4.5 to 4.75 per cent. About 20 per cent of people with mortgages are on variable-rate deals, so after eight rises in the base rate since last December, they will already be making higher repayments. The Bank has projected that annual interest payments could climb by just under £3,000 for a customer with a £130,000 mortgage on a 20-year term, assuming they have a fixed rate of 2 per cent that rises to 5.5 per cent. Although savers may benefit from higher returns on their accounts, consumer demand could be hit severely by the impact of a higher cost of borrowing and high inflation.

Those on lower incomes, in particular, will feel the squeeze as they spend more, relatively, on housing and energy than those on higher incomes, who may also have a cushion of savings that they can use to keep spending. Companies should be investing in the economy to the extent they were before Covid. Without this business spending, it can be more difficult for the economy to expand.

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Comments

  1. Chase7 November 2022 at 12:15

    6 per cent is not enough. We need 10% and more to catch up to inflation. And yes, we need more business spending from companies, otherwise inflation will go up even more.

    ReplyDelete
  2. Greta7 November 2022 at 19:21

    It's the lower incomes that get hit the hardest, as always. They are the largest category in every country, not just the UK and it's the hardest to help them. That doesn't mean the Government and companies can't be proactive about it and introduce certain measures and increase spending so inflation is kept under check and people afford to pay bills and buy things to encourage the economy.

    ReplyDelete

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