INTEREST RATES RISE
The apparent resilience of the UK economy has been a repeated source of surprise and relief over the past year, with indicators
pointing to growth despite the shadow of Brexit. However, the general consensus amongst economists is that it is only a matter of time before cracks begins to show. The Chancellor’s downgrading of economic growth forecasts in his Autumn Budget
are perhaps the first concrete acknowledgement of the difficulties ahead.
The UK economy grew 0.4% in Q3 2017 and the OBR forecast is for 1.5% in 2018 and 1.4% in 2019, down from 2% in its previous forecast. As recently as July 2015, it had been predicting 2.5%. The implications for living standards and national budgeting are significant – with growth of 1.5% the government will struggle to fund public services without raising taxes.
In reality, the economy has been buoyed by widespread global recovery but its relative growth is poor in relation to other leading economies. The UK has moved from the top of the G7 growth league table to the bottom.
The fall in sterling has not been the boon to inward investment that it should have been and businesses are concerned about
looming labour shortages. That disappointment has been echoed in the residential market where overseas buyers have pulled back from the market, despite their increased buying power of their currencies.
Unemployment at its lowest level since 1975 is normally a positive signal of a flourishing economy but the prospect of restrictions on migration from the EU, means that recruitment could become increasingly difficult, particularly in London which has relied so heavily on an internationally mobile labour force. London has built a sizeable cluster of biotech and medical businesses, as well as the more widely-heralded tech and its established financial sectors but these can only prosper with access to a global pool of talent.
Employment, thus far, has remained remarkably strong in London and it continues to rely on a highly qualified and mobile
international workforce. However, the uncertainty surrounding the UK’s future place in the global economy, underlines the
benefits of flexibility associated with renting rather than buying. We may now have a certain date for leaving the EU, 29th March 2019 but the future of the London economy is far from certain.
Inflation rose to 3% in 2017 and was still at that level in October, although the OBR predicted that it would fall back to 2% within a year. At this rate, wages growth, which rose at an annual rate of 2.2% in Q3, is not keeping pace. In fact, wages growth has been below inflation for seven consecutive months.
The indicator that is causing most concern seems to be productivity. It has not increased for a decade and the OBR’s forecast that it will improve to half its historic rate offers little comfort. That is primarily a function of investment and the UK needs to remain an attractive investment proposition. The lack of progress on talks with the EU was becoming increasingly unsettling for the financial sector who had hoped to find that their base in London would be protected but we ended the year with a Stage One agreement on Brexit negotiations and optimism for trade talks moving into 2018.
In November, the Bank of England announced the first rise in interest rates for a decade, moving them from 0.25% to 0.5%. A
doubling in the rate of interest will have implications for some highly geared borrowers but, at 0.5%, it remains at a historically low level and the Bank sought to reassure borrowers that they would not rise above 1%.
All of this feels somewhat precarious and the mood at the end of 2017 is sober. Policymakers in Dublin, Frankfurt and Paris
are alert to opportunities created by London’s weaknesses but, however appealing it might be for them to imagine taking over from London as Europe’s financial capital and leading global city, the reality must be daunting. There is no doubt that the scale and momentum of London’s economy, cultural offering and cosmopolitan population, remains a powerful force to be
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