Weekly Economic Briefing

Resilient, but for how long?

17 January 2017


Media commentators and many MPs took great delight in the ‘mea culpa’ from Andy Haldane, Chief Economist at the Bank of England, that the economics profession had made mistakes in its forecasts of how the economy would perform after the EU referendum vote. A more accurate statement of his views might be that although the UK economy has not slowed as much as expected, the conditions are falling into place for a sizeable squeeze on household incomes this year. Whether individuals and firms react by tightening their belts, or borrowing to sustain activity, will depend on something very hard to measure, but no less important for that fact – animal spirits – which Haldane was at pains to emphasise economists find difficult to forecast.

Optimism returns
Ongoing resilience

Indeed, the economic data continued to look quite positive into year end. UK car sales reached a record 2.7 million units in 2016, although SMMT forecasts a 5% fall in 2017. Barclaycard reported consumer spending growth was 4.0% y/y in December, slower than the previous two months but still strong by post-crisis standards. The BRC also reported that like-for-like sales were stronger in December than November, although that was led by food, tying in with stronger reports from most supermarkets. Meanwhile, industrial production jumped by 2.1% in November, following three successive monthly declines, though the average in the first two months of the quarter was 0.5% lower than in Q3, pointing to a second successive quarterly output decline in the sector. The manufacturing PMI index surprised to the upside in December (see Chart 3), hitting a 30-month high at 56.1. Better order books tie in with similar reports from European and US counterparts. The separate service sector and construction industry PMI reports were also upbeat, at 56.2 and 54.2 respectively. In a further survey, Deloittes reported that UK chief financial officers have become markedly more positive on the outlook for their businesses. In the fourth quarter, optimism among the UK’s largest businesses rebounded to the highest level in 18 months. Our UK Nowcast, which takes the common signal from 17 separate indicators, suggests that moderate GDP growth should continue into the first months of 2017 (see Chart 4).

Nevertheless, there are clouds on the horizon. Despite increased confidence, CFOs entered 2017 with low levels of risk appetite and a focus on defensive balance sheet strategies. As foreshadowed above, headline inflation has begun to respond to the rise in oil prices and the large depreciation of sterling. The CPI in December reached 1.2% pa, and the RPI 2.2% pa; these were the highest rates of growth since late 2014, driven by more expensive fuel costs plus the impact of a lower pound on clothing and footwear. Households are beginning to react; the Gfk survey of consumer prices has reached its highest since 2000, while the consumer confidence index fell back last month. Households have already lowered their savings ratio quite significantly during 2015-16. This can be shown in another way: net unsecured consumer lending was £2 billion in December, up 11% pa and the highest level since 2005. Mortgage approvals reached 67,000 in November, the highest in eight months. While it would be unwise to assume a reversal in the savings trends of UK households, a decline large enough to fully offset the real income squeeze also seems unlikely – hence our forecast that consumer spending and overall growth will moderate this year.

Andrew Milligan, Head of Global Strategy


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