Duncan Lawrie Online ▼

Posted on: 13 July 2015

With the General Election now fading into a 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 last month.

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. First, 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 stay the hand of the Bank of England for fear of placing too much pressure at once on the economy. Finally, the UK still has one of the worst productivity records in the developed world[1] - i.e. output per hour per worker is very low - so the economy cannot grow very fast without generating inflation.

We would argue that these are mere obstacles and hurdles to be 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 c.3%.

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All data has been compiled by Duncan Lawrie from sources believed to be reliable. Full details of sources are available on request.
Information provided in the above articles and any opinions expressed are for general use only. You should always take specific advice to suit your personal circumstances before taking any action. Errors and omissions excepted.
The value of investments and income generated may fall as well as rise, and investors may not get back the amount invested. Past performance is not a reliable indicator of future results.

[1] Office for National Statistics