UK data creates dilemma for Bank of England rate setters

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Data showing the UK economy contracting more than expected in July, coupled with wage growth at record levels, have given Bank of England policymakers plenty to chew on as they weigh up whether to halt interest rate rises next week.

GDP fell 0.5 per cent between June and July after growing the previous month, as bad weather and strikes hit economic activity. The less volatile three-monthly figure showed output up by 0.2 per cent on the previous three months, continuing the weak performance since late 2021, although the latest figures do not yet incorporate the large revisions announced earlier this month for the pandemic years.

Today’s data follows yesterday’s news that wages are finally growing faster than inflation, a welcome development for households but likely to reinforce the BoE’s concerns over stubborn inflationary pressures.

Pay excluding bonuses remained at 7.8 per cent — the highest rate since comparable records began in 2001, while total pay, boosted by one-off payments to NHS workers and civil servants, was up 8.5 per cent. Latest inflation figures show prices rose at 6.8 per cent in the year to July.

Other aspects of yesterday’s data suggested however the jobs market was weakening, with unemployment rising and hiring slowing.

Catherine Mann, one of the BoE’s more hawkish policymakers, argued this week that more rate rises were needed to curb the inflationary threat. Many economists however think that the impact of 14 consecutive increases in rates will weaken the economy further in the months ahead.

Yael Selfin, chief economist at KPMG UK, said: “With the backdrop of weakening global economic conditions coupled with the lagged impact of higher interest rates, the UK economy could struggle to keep its head above water in the remainder of the year.” The impact of rising rates was also highlighted in new data yesterday showing mortgage arrears at a seven-year high.

The state of the public finances meanwhile has prompted ministers to consider changes to the “triple lock” rule on state pensions, one of the most sensitive issues in UK politics, which stipulates they should rise annually by whichever is highest out of earnings growth, consumer price inflation or 2.5 per cent.

The economy is set to be the dominant theme in the general election likely to take place next year. 

The opposition Labour party, currently riding high in the polls, is likely to inherit a much worse situation than when it last came to power in 1997. Its then leader Tony Blair told the FT in an interview yesterday that the party would be unable to fix the economy through tax and spend. “If [current leader] Keir Starmer wins the election, which I think he’s got a good chance of doing, he’ll be the sixth prime minister in eight years,” said Blair. “That’s a country that’s in a mess. We are not in good shape.”

Longer term, the prospects are equally daunting: the government’s social mobility tsar yesterday was the latest to warn that the younger generation was in danger of being worse off than its predecessors.

Need to know: UK and Europe economy

The UK is poised to unveil a £500mn-plus investment to secure the future of Britain’s biggest steelworks at Port Talbot in Wales. The long-awaited agreement with India’s Tata Group is expected to be announced this Friday.

Ursula von der Leyen also announced that former Italian prime minister and president of the European Central Bank Mario Draghi would take on a new role assessing the EU’s economic competitiveness. Claudia Buch, the deputy head of Germany’s Bundesbank, is set to become the eurozone’s top financial supervisor.

New data reinforced the gloom surrounding eurozone economic prospects, with industrial production falling more than expected in July. The crisis in German construction is also worsening, with cancelled building projects and financial distress among landlords and builders at their highest levels since reunification three decades ago.

Need to know: Global economy

The world is at “the beginning of the end” of the fossil fuel era, according to the International Energy Agency, which has forecast that demand for oil, natural gas and coal will all peak before 2030. Its chief Fatih Birol called on policymakers to do more to accelerate the transition.

The World Trade Organization said global trade was fragmenting as countries switched supply chains to allies rather than the most efficient exporter. The UK’s outgoing trade chief warned of the dangers of global protectionism.

Investment chiefs at BlackRock and Amundi, two of the world’s largest asset managers, warned of the rising risk of a US recession.

The EU, the US, the UK and China all have plans for regulating artificial intelligence but will there be any international co-ordination? Read our new deep dive.

Ecuador voted to ban mining in a Unesco-designated biosphere reserve rich in untapped reserves of gold, silver and copper, alongside another vote to halt oil drilling in a section of the Amazon rainforest. Industry however says the economic costs are huge.

Our series on the return of Big Government continues. Will voters accept the high price of military spending as the peace dividend disappears?

Need to know: business

China warned it had “noticed reports” of iPhone-related “security incidents” and told smartphone makers to comply with the law in its first official comments following news that government bodies were cracking down on Apple devices. The company unveiled its new iPhone 15 range yesterday.

Citigroup announced its biggest reorganisation in almost 15 years with a simplification of the bank’s structure and likely job cuts.

The increase in oil prices, which last week topped $90 a barrel for the first time in 2023, driven by output cuts from Saudi Arabia and Russia, is starting to hurt business. American Airlines today slashed its third-quarter profit forecasts because of the surge in fuel costs, while France’s TotalEnergies is extending price caps at its petrol stations as fuel distributors come under pressure from the government.

Inditex, the world’s largest clothing retailer and owner of the Zara brand, continues to defy the cost of living crisis squeezing many consumers. Quarterly net profits jumped 30 per cent from a year ago to €1.3bn, allaying concerns about rising costs.

Less Common Metals, Britain’s only rare earths metal producer, is prioritising expansion in the US and EU because of post-Brexit obstacles for exporting to mainland Europe.

The legal industry is the latest sector vying for business in the burgeoning space race.

Should you pay more for your pint during peak hours? Stonegate, the UK’s biggest pub company thinks so: “dynamic” beer pricing is now a permanent feature at its hostelries, a move the company says will help offset high costs.

The World of Work

Columnist Sarah O’Connor says the Labour party’s commitment to sectoral collective bargaining in the UK could bring positive changes to industrial relations.

How do you ask for a pay rise? Listen to the live edition of our Money Clinic podcast.

Isabel Berwick speaks to three experts to find out why changing careers can have surprising benefits — and how to do it best in the Working It podcast.

Some good news

Read about how a crowdsourcing app is making cities safer for young people, how Minecraft is enabling them to help redesign public spaces, and how online forums are giving the disenfranchised a voice in our Thriving Cities special report.

Source: Economy - ft.com