The UK economy has been a less outlier than thought in the peer group of countries, according to a recent flow of data. Figures showed unexpected resilience in the UK’s economy and lowered inflation.
Few weeks ago, Britain remained the only advanced economy with a consistent downward trend in prices, despite having highest inflation rate of the G7. Analysts predicted that the UK’s output would contract in the second half of 2012, despite it not yet having recovered to its pre-pandemic quarterly levels.
Markets had already priced in an increase in the Bank of England’s interest rate from its current 5% to 6.5 % by the end of this year. This would have caused mortgage rates to rise and the property market to be in turmoil.
In June, UK inflation unexpectedly dropped to 7.9 percent — the lowest rate in the last three years — down from 8.7 percent the previous month.
Surprisingly, strong retail sales in June and a better-than-anticipated economic performance in the three months to May led many analysts to forecast a marginal output expansion in the second quarter.
The UK is still the outlier in the world when it comes down to inflation. It still deserves the label of a stagflation country. But, the recent economic news has shown that the gap between the UK and the rest of the world is closing.
The consultancy EY raised its UK economic forecast for this coming year from 0.2 to 0.4 percent, citing signs of increased resilience.
Torsten Bell is the chief executive at the Resolution Foundation think tank. He said, “The UK’s economy is in an awful place. But the economic data of the last 10 days have offered some welcome hope.”
In June, UK core inflation (which excludes food and energy) fell, finally catching up with the rates in the US, and eurozone after having risen in the opposite direction the previous months.
The sharp drop in inflation also indicated that pressure on consumers and mortgage holders is lessening. Markets now expect the central bank will raise interest rates, which increase the cost of borrowing, less quickly.
Kallum Pickering is an economist at Berenberg Investment Bank. He said that this “reduces risk” of the BoE having to impose a Hard Landing in order to control inflation.
Economists warn that the wage increase registered in the three-month period ending May still poses a threat to inflation.
Bell said that the big question was how a rapidly cooling labour market would bring an end to historically high wage growth. This has already happened in the US as well as eurozone.
Many analysts believe that this will occur soon. This is partly due to the decline in inactivity on the UK’s labour market, which has made it tighter than other countries. According to the latest data, the rate of job inactivity has fallen to its lowest level since spring 2020 at the start of the Covid pandemic.
Official data revealed that the UK’s resilient growth and labor market allowed public sector lending to decline in June, compared to the same month last. The warm weather in June also boosted retail sales for the third time in a row.
Simon Harvey, the head of analysis for foreign exchange company Monex said that over the last two weeks, fears about inflation sticking, spiraling wages, rising borrowing costs, and falling house values “have diminished considerably”.
But despite these encouraging figures, the UK still performs poorly when compared to other countries. The economy in the three-month period ending March was still 0.5% smaller than it had been during the fourth quarter of 2019 before the pandemic.
Comparatively, the US economy has grown by 5.6 percent and the eurozone by 2.2 percent over the same period.
While falling, is still higher than in most richer countries. Food inflation, while falling, is still higher in richer countries. The markets still expect that UK interest rates will increase more than other large economies in the next few months.
Dales said that the UK had made progress in reducing the gap between inflation and the US. He added that the UK still had a greater inflation problem than the US or the Eurozone and experienced a slower growth of its gross domestic product in recent years.