What's happening to the UK economy?
- To understand the lagged effect of monetary policy
- To be able to explain the reasons the UK economy has proved resilient so far
- To understand the challenges facing the UK economy
- To understand the lagged effect of monetary policy
- To be able to explain the reasons the UK economy has proved resilient so far
- To understand the challenges facing the UK economy
Much UK economic data has been revised recently, implying the performance of the economy has not been as bleak in recent years as first feared.
But even with those revisions, the UK economy grew by just 0.3 per cent in the first quarter of this year, and 0.2 per cent in the second quarter.
Meanwhile, UK inflation fell to 6.7 per cent in August, having been more than 7 per cent in June and above 10 per cent at its peak earlier in the year.
Gerard Lyons, chief economic strategist at Netwealth, says those figures need to be seen in the context of the full impact of interest rate rates not yet being felt in the wider economy.
This is because economists generally take the view that there is a time lag between an interest rate change being announced, and its impact being felt within the economy.
This lag is generally assumed to be around one year, meaning that many of the rate hikes have yet to be felt in the economy, with the first rate rise having happened 15 months ago.
Delayed reaction
This is a view endorsed by Richard Carter, head of fixed interest research at Quilter.
He says that while recent UK GDP data has been positive, despite higher rates, “it may just be a case of pain delayed until 2024”.
He adds: “We are also seeing shoots that the cost of living crisis may be easing for households.
"While expenses are still elevated compared to pre-pandemic periods, disposable incomes are beginning to move ahead, bringing relief to many households who will have struggled over the winter months and where excess savings from the pandemic have dried up.
The economy may be holding up just now, but it is asking a lot for it to continue to do so for quite so long.Richard Carter, Quilter“However, given the speed of interest rate rises and the cumulative effect of the cost of living crisis, it may just be a case of the pain being delayed, with 2024 looking more challenging.
"The Bank of England has an incredibly difficult job to do, and with next year likely to see a general election at the same time, they won’t want to overcorrect and tip the balance of power one way or another.
"With rates expected to say higher for longer and no sign of when to expect the first cut to rates, consumers will continue to be buffeted by the economic headwinds. The economy may be holding up just now, but it is asking a lot for it to continue to do so for quite so long.”
