The four enemies of the British recovery

by Valentina Magri

Housing, inflation, Bank of England, Wages

According to IMF forecasts, Britain will enjoy a bigger increase in GDP than any other country in Europe after being upgraded from 1.9 per cent to 2.4 per cent.

But there are at least four risk factors that may weaken the recovery.

Puzzling politics

There is a complicated political background to deal with this year. To start with, David Cameron has promised British people “reform first, referendum second” over Europe exit by the end of 2017. The threat of an EU exit acts as a “sword of Damocles” over the City and financial industry according to the Lord Mayor of London Fiona Woolf. In addition, the referendum on Scottish independence on 18 September 2014 may be the starting point of a breakup of Great Britain.

There are also regional differences that has created a national imbalance in the UK. According to professor Travers of the LSE: “London is the dark star of the economy, inexorably sucking resources, people and energy”. The greatest disparity regards the housing market: London’s property prices growth in the City (11.6 per cent) is more than double of the national average.

Housing market

A housing market bubble could derail the economic recovery in Britain. At a national level, the Rightmove index indicates a 6.3 per cent increase year-over-year in the 12 months to January, the highest increase since November 2007. Halifax and Nationwide indexes suggest this year will also continue on an upward trajectory.

But predictions are very different: they range from four per cent to eight per cent increases. Economics professor James Mitchell says: “The results raise the risk, although not the certainty, that house prices will fall, although predicting the timing and the manner of any fall is even harder than identifying the presence of a bubble”

The policy director for London Council Dick Sorabji adds: “If we don’t build enough houses by 2030 one starts to get to a point where people won’t be able to live close enough to where London jobs are to afford to do those jobs. You could reach a limit to growth”.

High inflation vs low wages

But house prices are not rising alone. Contrary to the Eurozone, the UK has an inflation rate running at or near two per cent or more. The problem is that it is coupled with a lack of wage growth. ONS data revealed that  wages are increasing at 0.9 per cent including bonuses, below forecasts of one per cent by economists and also well below inflation rate. Workers of the public sectors are suffering most, since their wage growth is just 0.2 per cent.

Clearly, steady retributions together with rising prices will invariably reduce consumption.

Raise in interest rates

Apart from steady wages, there are positive signals coming from the labour market as I explained in the article “New year, new jobs market”. Data published last week concerning the three months to November confirm the positive outlook with the unemployment rate falling to 7.1 per cent. Apart from being unexpected (the consensus was 7.3 per cent), it is the lowest level since April 2009 and the largest fall since 1997.

It means that unemployment may soon fall under the seven per cent threshold which the Bank of England’s Monetary Policy Committee has signalled as being the threshold for rising interest rates. BoE minutes released last week contradicts this forward guidance: the MPC’s members think there is “no immediate need to raise Bank Rate even if the seven per cent unemployment threshold were to be reached in the near future”. But an unexpected and premature raise in interest rates may undermine the recovery.

In conclusion, the recovery is here. But it must be protected. Especially from ourselves.

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