News & Events
By the halfway point in the year, we usually have a good feel for what the economic outlook will be for the rest of the year. In boom times, there’s plenty written about predictions as to how long the boom will last. In times of recession, the focus is more on when the ‘green shoots’ of recovery will emerge.
The UK economy is in neither boom nor bust, so what is the data showing?
As of May 2023, inflation was sitting stubbornly at 8.7%, down from 10.1% in March 2023 – so although prices are still rising, the rate of the rise is slowing down. Inflation is nonetheless significantly higher than the Bank of England’s target rate of 2%.
The Bank of England’s advisory committee predicts inflation of around 4 to 5% by the end of the year, although the Chancellor does not completely back this prediction. The biggest risk to the predicted fall in inflation comes from the stubborn rise of food inflation, which is at the heart of the cost-of-living crisis. The factors affecting the price and cost of food are outside of the Bank of England and government’s direct control so there is a good deal of uncertainty about how this component will affect the overall inflation figure over the next six months.
Other factors included in inflation, such as the rise in fuel costs, have fallen out of the 12-month inflation figures, although total transport costs still account for 1.3% of the 8.7% May inflation figure.
The Bank of England has certain tools to help control inflation (such as interest rate rises and falls) but these are very blunt tools. The idea behind interest rate changes is to influence demand by making the cost of borrowing money either cheaper or more expensive. Higher interest rates are designed to make borrowing money more expensive and eventually, this should lead to less demand in the economy because there is less money being spent.
The downside to high interest rates is that they dampen economic growth because they make spending and investment more expensive. Growth is important for improving living standards that have worsened by inflation. Currently growth is very low for a G7 economy with 0.1% in Q1 2023 and the Bank of England predicting growth of 0.25% for year.
Another more immediate effect of high interest rates is that mortgages linked to the Bank of England base rate become more expensive. Again, this is because borrowing money becomes more expensive. Currently interest rates have been raised for 18 months in a row with a further rise of 0.5% to 5% this month, with predictions of further increases to 6% by the end of 2023.
Unemployment data is also a useful indicator of the health of an economy. Low unemployment usually indicates high employment with all the benefits that goes with it. Unfortunately, the latest figures show a further rise in the unemployment rate with a significant jump in the number of unemployed people with long term illness.
It would normally follow that with the economic data being less than impressive and economic uncertainty high, UK insolvencies would also be high. The actual picture is, however, mixed. The total number of UK insolvencies was 1,685 in April 2023, 31% lower than in March 2023. That said, March’s figure was 38% higher than February 2023.
It should be noted that the number of UK insolvencies fell dramatically during the pandemic for several reasons and the figures did not start returning to anywhere near normal until this time last year. There is therefore a lagging effect to the insolvency numbers for the past six months because they likely include some insolvencies which did not present themselves during the pandemic.
That said, UK insolvencies are now 29% higher than the equivalent period in 2019 (excluding pandemic years); the total number of company insolvencies is at the highest level for Q1 since the financial crash of 2008/09.
Economic data can often feel very detached from our daily lives but the issues behind the numbers are in control of very real-world effects.
For example, interest rates affect a variety of financial products, from savings and loans to mortgages and pensions. They also affect the price of goods and services that we pay for, since individuals and businesses may need to review their prices because their costs increase.
The answer of paying people more to cope with rising prices is also not straight-forward. If more people are paid more for the same amount of work, then this can lead to a rise in inflation because demand is outstripping supply. The problem of high inflation is where we started, and the puzzle therefore risks becoming circular as prices keep on rising.
This is why some economists have suggested that a recession – two consecutive economic quarters of negative growth – may be the answer. The theory is that a shrinking economy reduces demand and therefore reduces inflation. The problem with recessions is that they often lead to job losses and rising insolvencies.
There are no easy, pain-free answers. But whilst the figures may become worse before they get better, the UK economy has proven itself resilient to economic downturns in the past, so it’s more a question of when – rather than if – the upturn will occur.