A news article posted by the private bank Duncan Lawrie recently suggested that with the General Election now fading into memory, short-term political uncertainty appears to have faded as well. Issues like the EU referendum and the devolution of more powers to Scotland are still bubbling away in the background, but the consequences are probably too far in the future to affect confidence today, so recent economic data has enjoyed a short-term fillip.
Underpinning this relatively halcyon picture is the fact that British consumers are enjoying a particularly encouraging combination of advantages not seen since the 1990s: low inflation, falling unemployment and a tentative pick-up in wage growth. This is very positive for consumer confidence which hit a 15-year high in June 2015.
The construction sector is also upbeat with confidence rising since the Conservative election win. House building is one important reason for this, as the number of new houses registered from March to May was up by 15% on the same period last year. The Government is also expected to introduce further measures to boost house building, to narrow the gap between what the country needs in terms of new homes and what is currently being built. Manufacturing and exports, however, remain more subdued, with the strength of sterling against the euro causing some difficulty.
The UK is therefore relying on its old stalwarts of consumer spending and housing to drive economic growth – but in the medium to longer term there are some factors that may upset this benign backdrop. Firstly, the Government is planning significant cuts to spending as it attempts to bring the budget back into balance. Secondly, interest rates should eventually go up, although fiscal tightening may steady the hand of the Bank of England for fear of placing too much pressure at once on the economy. Finally, according to the Office of National Statistics the UK still has one of the worst productivity records in the developed world – i.e. output per hour per worker is very low – so the economy cannot grow very fast without generating inflation.
Duncan Lawrie would argue that these are mere obstacles and hurdles to overcome. They seem unlikely to lead to recession, however, they may mean that in due course economic growth will begin to slow from the current level of around 3%.
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