By William Schomberg and Sumanta Sen
LONDON (Reuters) – Britain’s economy is slowing and might be heading for a recession as it feels the impact of 14 back-to-back interest rate increases by the Bank of England to fight high inflation.
Despite being buffeted by Brexit, the COVID-19 pandemic and last year’s surge in energy prices, the British economy has defied forecasts of contraction so far this year.
But signs of a slowdown are mounting, highlighting the BoE’s dilemma as it continues to grapple with inflation.
A survey published on Wednesday showed activity among businesses shrank by the most since January 2021, when Britain was still in a coronavirus lockdown.
The housing market is weakening and the jobless rate is up.
But the BoE looks set to keep on raising rates with inflation still more than three times its 2% target. Core inflation in July held close to its highest in more than 30 years.
Most worrying for Governor Andrew Bailey and his colleagues, pay growth is at its fastest since at least 2001, raising the risk of persistently high inflation.
Below are key readings of Britain’s economy that the BoE will assess before its next scheduled announcement on interest rates on Sept. 21.
BUSINESSES FEEL THE STRAIN
Britain’s economy is on course to shrink during the current quarter and risks falling into a recession, the preliminary S&P Global/CIPS Purchasing Managers’ Index for August showed.
The composite reading – covering firms in services and manufacturing – of 47.9 raised the risks of a recession in the second half of 2023.
But S&P also said its survey suggested inflation would cool to 4% in the coming months, earlier than the BoE’s forecast.
HOUSING MARKET LOSES STEAM
House prices as measured by mortgage lenders Nationwide and Halifax have fallen by the most in annual terms in more than a decade, although they remain about 20% above levels before the pandemic, when demand for properties surged.
The BoE acknowledges that much of the impact on the housing market from its rate hikes has yet to be felt because most mortgages in Britain are short-term fixed-rate deals which are now renewing at higher rates.
Of nearly 7 million fixed-rate mortgages, which account for 80% of residential home loan deals, around 800,000 end in the second half of 2023 and a further 1.6 million deals end in 2024.
LABOUR MARKET
Employers struggled to fill jobs when the number of people available for work contracted after the pandemic and Britain’s exit from the European Union. Basic wages in the three months to June rose at the fastest pace on record.
But there are also signs that the labour market is losing some of its inflationary pressure with the unemployment rate unexpectedly rising in the last two monthly data sets and vacancies steadily dropping over more than a year.
CONSUMERS KEEP ON SPENDING
Retail sales volumes fell in July from June but it was only the second month-on-month drop so far in 2023 and much of the weakness was due to unusually heavy rain which kept shoppers at home. But many analysts expect the lagged impact of the BoE’s rate rises to hit spending soon, adding to the drag on the economy.
Consumer confidence, as measured by polling firm GfK, fell in July from a 17-month high in June. It remains below levels seen for much of the past 10 years.
INFLATION FALLS, BUT STILL TOO HIGH
Britain’s headline rate of consumer price inflation has fallen from over 11% last October to just under 7% in July but that is still the highest among the world’s major economies and more than three times the BoE’s 2% target. Core inflation, which gives a better signal of underlying inflation, has barely fallen from a three-decade high.
GDP HAS HELD UP, SO FAR
Britain’s economy has defied forecasts that it would fall into a recession in 2023 and has grown in four of the first six months of the year, helped by the still low unemployment and savings built up by households during the pandemic. Many economists think the delayed impact of higher interest rates and still elevated inflation will hit growth in the coming months.
A Reuters poll of analysts in July showed a minority expected a recession to start before the end of the year.
Britain is the only Group of Seven (G7) economy yet to recover its pre-pandemic size.
(Graphics by Sumanta Sen; Editing by Devika Syamnath)
