UK: Deloitte Monday Briefing: The Sweet Spot Of The Economic Cycle

Last Updated: 29 April 2014
Article by Ian Stewart

Most Read Contributor in UK, August 2017

* The UK economy is in the sweet spot of the economic cycle, with activity gathering pace and inflation falling away. Some call this the Goldilocks moment, when growth is neither too hot nor too cold.

* UK growth is powering ahead at a faster rate than any other major industrialised nation. This week's UK GDP data are likely to show that the economy expanded by a heady 0.9% in the first quarter of this year.

* The good news is strong growth is being combined with low inflation. CPI inflation has almost halved from last year's peak and is now running at 1.6%, the lowest level in five years.

* The UK recovery is looking more sustainable too. Investment and consumer incomes, two conspicuous gaps in Britain's recovery, are making a comeback.

* Business investment rose by 8.7% in the year to the fourth quarter of 2013, more than four times faster than the growth of the wider economy. The independent forecasting body, the Office of Budget Responsibility, thinks this is the start of a boom which will see investment rise by 50% over the next five years. The animal spirits of the corporate sector are stirring. Last week's CBI Industrial Trends Survey reported that investment intentions among UK corporates are at the highest level in 16 years.

* A fierce and lengthy squeeze on consumer spending power is finally drawing to an end. Inflation has outstripped growth in wages and salaries for most of the last 4 years, shrinking spending power for many consumers. But recent sharp falls in inflation mean have left earnings rising marginally faster than prices. Over the next two year we expect this gap to widen, with consumers once again seeing sustained growth in their spending power.

* Forward looking indicators suggest that the recovery has legs. Last week's CBI Survey showed that business optimism is at the highest level since 1973. A year ago, businesses feared the UK economy could "triple dip". Respondents to the CBI Survey now expect UK demand for their goods and services over coming months to grow at the fastest rate since 1977.

* Growth is picking up but as long at it continues to be coupled with low inflation the Bank of England is likely to raise interest rates fairly gradually.

* It is, however, worth bearing in mind that higher interest rates are not the only way of dampening monetary exuberance.

* Over the weekend, new rules came into effect that require UK mortgage lenders to carry out checks on the ability of new borrowers to meet their repayments. In the wake of the financial crisis, the Bank of England has been given extra powers to control the supply and price of credit, for instance by instructing lenders to alter loan-to-value ratios. If the housing market continues to bounce back the Bank may use its new powers to reduce the supply of credit to consumers.

* But for now, at least, we are at the moment in the economic cycle where the good news is rolling in, with economists raising their UK growth forecasts and cutting their inflation forecasts.

MARKETS & NEWS

UK's FTSE 100 ended the week up 1.6%, supported by rising technology and pharmaceutical shares.

Here are some recent news stories that caught our eye as reflecting key economic themes:

KEY THEMES

* UK unemployment fell to a 5-year low of 6.9%, driven by a 146,000 increase in the number of self-employed workers in the 3 months to February

* The Bank of England's quantitative easing programme has boosted UK growth by around 3% and raised inflation, according to a working paper from the Bank

* Numericable, the French cable unit of Altice, raised €7.9bn in the largest corporate junk bond issue in history

* Swedish consumer prices surprisingly fell by 0.4% in March from a year earlier, meaning that 8 European Union countries are currently in deflation

* The US's largest companies have raised significant amount of debt in the last 3 years, despite strong cash balances, according to analysis from S&P

* Standard & Poor's raised Cyprus's credit rating to "B" after its economy contracted by a less-than-expected 5.4% last year

* Ireland's 5-year borrowing costs briefly fell to 1.07%, marginally above that of the EFSF, the European bail-out fund that lent Ireland €17.7bn in 2011

* Bank of America Merrill Lynch warned that the world may have reached "peak water", with demand for fresh water forecast to overshoot supply by 40% in the next 20 years

* Japan's government cut its outlook for the Japanese economy, with a drop in consumer sentiment following this month's sales-tax-increase to 8% from 5%

* Consumer prices in Tokyo rose at an annual rate of 2.7% in April, their fastest growth in 22 years

* Amazon reported a net loss of $60m in its international business for Q1, due partly to infrastructure investments to expand its business in China

* Greece sold €750m worth of 5-year government bonds at a rate of just 4.5%, with the sale oversubscribed 3 times

* Ratings agency Standard & Poor's cut Russia's credit rating to one notch above 'junk', warning that it faces further downgrades in the event of tighter sanctions over Ukraine

* The price of Nickel hit a 14-month high, due to rising tensions in Ukraine, the world's second largest producer of the metal

* Asda have predicted that 95% of their entire fresh produce range is at risk from climate change, with strategic investments needed to manage weather implications, for example, growing salad crops under cover

* HM Revenue & Customs are examining "charging options" under plans to sell the anonymised personal financial data of customers to private firms

* The Financial Times reports that US banks have experienced their worst start to the year in fixed-income trading since the financial crisis, as financial regulations having curbed risk-taking

* Male maintenance staff at a Welsh university successfully sued their employers over sex discrimination, having been paid less than their female equivalents

* A group of European academics have found that company bosses are less likely to cut jobs to boost margins if they are in line for a knighthood or damehood, for fear of harming their public image

* Research by the Wall St Journal shows that in 50 years American consumption of chicken has risen more than 140%, with consumption of beef falling by 23% – poultry returns.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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