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UK economy isn’t as strong as it looks

Sun, 27/07/2014 - 09:03

The UK economy isn’t as strong as it looks, says Ben Bretwell, senior economist at Hargreaves Lansdown…

While the UK economy has surpassed its pre-crisis peak in absolute terms, a larger population means GDP per capita is around 6% lower. The economy has been growing by adding jobs, but there is an underlying issue with productivity, and this is why we are not seeing any meaningful increase in wages. Despite another upgraded growth forecast from the IMF I believe significant challenges lie ahead.
 
The Bank of England has already noted some tentative signs of a modest slowing in output in the second half of the year. There is also a risk of a destabilising oil price spike as a result of events in the Middle East and Ukraine.
 
We are still struggling with a substantial consumer debt burden. Outstanding personal debt stood at GBP1.445 trillion at the end of May, up from GBP1.425 trillion a year earlier. It is this level of indebtedness, combined with the lack of wage growth, which I believe will deter the Bank of England from raising interest rates in the near term.
 
Research suggests that for every 0.25% increase in the average mortgage rate, the average household's disposable income falls by about 1.25%. I don’t believe the economy is strong enough yet to battle that kind of headwind.


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