Household spending patterns changing
British households spent more money on essentials last month but are holding back of luxury items as uncertainty over the economy grow.
There is little doubt that the economy is slowing despite last week’s surprise NIESR report that GDP growth in the three months to June rose from 0.2% to 0.3%. Whilst these are pretty anaemic numbers, the fear that the U.K. could slip into recession has been averted, for now.
Credit card spending had its weakest quarter for four years, falling by 0.3% in June.
Bank of England Governor, Mark Carney has seen the consumer as being the bright spark for the economy so any fall in spending will be a major concern.
As real wages have fallen with inflation close to 3%, members of the Bank of England’s Monetary policy committee have been considering a vote to hike rates. It is becoming clearer that last year’s cut following the Brexit referendum was ill considered and will need to be reversed.
It was seen at the time as a knee jerk reaction to the referendum result and now needs to be reversed.
Yellen prepares to defend FOMC’s decisions
This Thursday, Janet Yellen the Fed Chair will testify in front of congress and provide her view of economic activity over the first half of 2017.
The Fed has hiked rates twice in 2017 following a hike in Dec. 2016. There jury is still out on whether the hikes were necessary economically or were they simply a measure to quell the rise in the stock market.
Mrs Yellen has been careful not to give any credence to suggestions of the latter following one of her predecessor’s problems with “irrational exuberance”.
It is likely that she will have a tough time. Opinion has switched from wanting a normalization sooner rather than alter in late 2016 to calls for a continuation of expansive monetary policy now. Inflation remains under control; the stock market has flattened somewhat and hourly earnings are a little weak. We can discount the 222k new jobs created in June as there is a possibility that the number will be revised lower next month!
The dollar remains in the doldrums with the dollar index drifting around close to its recent lows.
Two FOMC members will speak later today and both are expected to support the actions already taken this year. There has only really been one dissenting member recently, Neel Kashkari President of the Minneapolis Fed has called for a halt to any further rises while the effect of those already done is fully appreciated.
Brexit worries cut CFO’s investment plans
BoE Governor Mark Carney has used, as one of his reasons for voting against a rate hike, his worries over business investment.
Yesterday, a major accounting firm in the U.K. issued a report which proves his concerns to be justified.
DeLoitte canvassed several CFO’s on their investment plans and found that the vast majority were planning to rein in any proposed expansion until it was clear what Brexit would mean. Only 8% of those canvassed felt that business conditions would improve once the U.K. had left the EU.
The fallout out from the election fiasco has also hit business confidence with another General Election this year a serious possibility. Business is concerned that should there be an election, a Labour victory would mean a rise in business taxes. Although any proposed rise would bring corporation tax back to 2014 levels, any increase in tax is a worry for business.
