The weak state of the UK economy is underscored this week by official figures showing a renewed slump in consumer spending amid rising living costs ahead of a possible slowdown in activity during the national period of mourning following the death of Queen Elizabeth II.
The city’s economists are forecasting inflation to rise further to 10.2% in August when official figures are released on Wednesday, as rising prices for weekly groceries and sky-high energy bills put financial pressure on struggling households. This would mean a slight increase from the July reading of 10.1%, which was the first time the CPI had risen above 10% since the early 1980s.
The figures come after the Bank of England this week delayed a decision on a further hike in interest rates from the current level of 1.75% to show respect to the Queen. With companies, financial institutions and unions canceling or postponing major events during the national period of mourning, the central bank’s monetary policy committee will wait until September 22 to act.
It was confirmed over the weekend that the Queen’s funeral on Monday 19 September will be a bank holiday. While the event offers an opportunity for the public to pay their respects, it could bring mixed blessings to businesses.
Rail industry leaders said travel to and from London would be “extremely busy” and urged mourners heading to the capital to plan their trips in advance.
Additional holidays can boost retail sales and hospitality spending. However, additional public holidays have also resulted in a drop in monthly output for the broader economy as companies and factories close their doors early. Official figures show a fall in monthly gross domestic product (GDP) for previous one-off holidays, including the Queen’s golden and diamond jubilees in 2002 and 2012, respectively.
Simon French, chief economist at city broker Panmure Gordon, said one-off bank holidays in 2002, 2012 and earlier this year had slashed economic output by at least £2bn. “There are few parallels for this moment and that makes forecasting particularly difficult,” he told the Sunday Times. “We may not just be talking about an additional holiday. There could be a longer period of national mourning.”
Government guidelines released last week are encouraging businesses to consider canceling or postponing events during the period of mourning, particularly on the day of the state funeral. However, there was no obligation to go out of business, the decision being left to each company’s discretion.
Nonetheless, some retailers temporarily closed their doors on Friday and many events, including conferences and sporting events, scheduled to take place this week have been postponed. Taken together, this disruption to normal business and cultural life could weigh on an already bleak economic picture.
Households have begun to rein in spending in response to soaring prices for basic necessities, with the city braced for figures that will confirm a fall in August retail sales in the UK when the Office for National Statistics released its latest monthly figures later this week data published. Economists polled by Reuters are expecting a 0.4% decline for the month, reflecting the slowdown in overall economic activity as the UK heads into a protracted recession.
Last week the government unveiled plans to freeze energy bills at an average of £2,500 a year for two years as part of a support package for households and businesses that represents one of the biggest government interventions since the financial crisis. In her first major act as Prime Minister, Liz Truss said her energy price guarantee would “give people security on energy bills, curb inflation and boost growth”.
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Economists believe the measures could prevent inflation from rising much further than current levels while helping to mitigate the effects of the recession. However, the bank is still expected to raise interest rates further amid the risk of high inflation becoming entrenched and as the pound comes under pressure in global financial markets amid speculation about the cost of Truss’s tax and spending plans becomes.
Figures released on Monday are expected to show that economic activity recovered in July after falling in June, when the platinum jubilee long bank holiday weekend weighed on growth. After UK GDP contracted by 0.1% in June, City economists are forecasting a monthly increase of 0.4% in July but warn that this will represent a temporary respite amid greater pressure on businesses and households.
“July GDP is likely to be disappointing,” said Klaus Baader, economist at French bank Société Générale. “Retail sales are likely to weaken again. Inflation probably didn’t pick up until August, but lately all the surprises have been to the upside so we should brace for another one.”
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