LONDON, July 12 (Reuters) – The UK economy is showing some signs of strain from the Bank of England’s 13 straight rate hikes, but the labor market is still generating inflationary heat and consumers have not severely reined in spending.
The BoE is expected to continue raising borrowing costs to bring down inflation, which was the highest among the world’s large rich economies at 8.7% in May.
However, the BoE is also aware that the economic impact of its 18-month rate hike campaign is not yet fully felt.
Below is a summary of the key economic metrics that the BoE will be keeping an eye on ahead of its next rate announcement on August 3rd.
INFLATION THREAT
UK consumer price inflation remained at 8.7% on an annualized basis in May, down from a peak of 11.1% last October, but was the highest among the Group of Seven advanced economies.
Even more worrying for the BoE is that two measures of underlying price growth – core inflation, which excludes energy, food, alcohol and tobacco prices, and service sector price increases – both hit their highest rates since 1992.
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REAL ESTATE MARKET
So far, the most notable impact of the BoE interest rate hike from 0.1% in December 2021 to the current 5.0% has been felt in the real estate market.
Home prices, as measured by mortgage lenders Nationwide and Halifax, are down the most on an annual basis in more than a decade as mortgage rates rise quickly in anticipation of further increases in borrowing costs.
The BoE knows the impact of its interest rate hikes is largely yet to be felt as most mortgages in the UK are fixed rate contracts, protecting homeowners from fluctuating borrowing costs but facing renewal at higher interest rates.
Of the almost 7 million fixed-rate mortgages, which account for 80% of home loan contracts, around 800,000 will end in the second half of 2023 and another 1.6 million contracts in 2024.
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bankruptcies
There are signs that companies, especially smaller ones, are struggling as borrowing costs rise and the economy is barely growing.
Business bankruptcies in England and Wales rose 40% year-on-year in May, hitting the highest level since monthly records began in January 2019, government data showed.
The construction and retail sectors were hit hardest, and the number of troubled food manufacturers also increased. According to auditing firm PwC, around 99% of liquidations involved companies with annual sales of less than £1m.
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LABOUR MARKET
But many companies are still hiring and raising wages drastically to retain and attract workers, a major concern for the BoE as it fights inflation.
This week’s data showed the strongest non-bonus wage growth since records began in 2001.
Annual non-bonus wage growth was 7.3% in March-May, too high for the BoE’s hopes of bringing inflation back to its 2% target.
However, there are also signs that the labor market is cooling off. The unemployment rate rose unexpectedly to 4% in March-May and job vacancies fell for the 12th straight month to their lowest level since mid-2021.
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CONSUMERS KEEP SPENDING
Most consumers have managed to keep up the pace of their spending despite the pressure on their incomes from inflation.
Retail sales in May rose unexpectedly from April, despite being 2.1% lower than in May last year.
Many people still have some of their savings from the pandemic. The savings rate, which measures household savings relative to disposable income and employer contributions to pension schemes, was 8.7% in early 2023, down from 9.3% at the end of 2022 but above 5.6% just before the pandemic hit .
Consumer confidence, as measured by polling firm GfK, hit a 17-month high in June, although it remains below levels for most of the past decade. Household debt is below the peak reached before the 2007-2009 global financial crisis.
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The risk of a recession remains
So far, the economy has defied recession forecasts made just a few months ago, but the recent surge in expectations of higher borrowing costs could yet result in a slowdown after a painfully slow recovery from COVID lockdowns this year.
UK gross domestic product recovered more slowly from the pandemic than any other G7 economy except Germany through the first three months of 2023, according to the data.
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graphics by Sumanta Sen, Kripa Jayaram and Vincent Flasseur; Edited by Paul Simão
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