Four months since
UK voters returned a Conservative government with a slender, but
workable majority, the outlook for the British economy remains
clouded. Most recently, expectations that the Bank of England (BoE) is
about to follow the lead of the US Federal Reserve - where the first
interest rate rise since the 2008 global financial crisis is expected
later this month - have faded. In the so-called ‘Super Thursday’
announcement of August 6, governor Mark Carney indicated that the BoE
benchmark rate was now likely to remain at its record low of 0.5% (at
which it has been held since March 2009) until at least early 2016.
This change in outlook has been reinforced by the mood of the Bank’s
nine-member monetary policy committee (MPC), which apparently still
has only one ‘hawk’ pressing for an early rate rise and eight ‘doves’
opting for continued inaction. This is despite warnings to MPC members
that the absence of a pre-emptive rise could mean that the eventual
increase from 0.5% will go further and be faster when it eventually
The prolonging of the UK’s low interest rate era partly reflects the
fact that in 2015 the country has been experiencing deflation for the
first time since 1960. Until relatively recently, the BoE’s target
rate of 2% inflation was regularly exceeded; the consumer price index
(CPI) measure preferred by the government was edging above 5% less
than four years ago. By contrast, in April the CPI registered a -0.1%
year-on-year decline and the July figure edged up from zero to 0.1%.
Messaging in Trade
The UK’s economic performance over the first half of 2015 has also
offered a mixed message. A disappointing first quarter GDP figure
(+0.3%) indicated a marked slowdown from the more robust figures
throughout 2014. However, the Q2 estimate suggests that the fall-off
was temporary and growth bounced back with a 0.7% increase from Q1.
Other recent data has added support for the view that growth may be
temporary. The steady decline in the UK unemployment rate over the
past two years has halted; possibly only temporarily, but an increase
in the jobless total in the quarter to June was the second successive
monthly rise. Data issued by Barclays indicates that the recent
weakness of the euro, which has depreciated against the pound by 16%
since the start of 2015, has undermined earnings growth for British
corporates while boosting the earnings of their Eurozone competitors,
which averaged growth of 17% in Q2.
pound has been reflected in mixed data on the UK’s trading
performance. The country’s total trade deficit for Q2 of 2015 shrank
to £4.81 billion (A$10.39 billion) from just under £7.5 billion, the
best quarterly figure since Q2 in 2011.
At the same time the Office
for National Statistics (ONS) reported that the deficit on trade in
goods and services for the month of June 2015 widened to £1.6 billion
from £900 million in May, supporting forecasts that the improvement
would prove temporary as the weak euro made life more difficult for UK
In addition, China’s move in mid-August to devalue the renminbi, which
has further undermined commodity prices, will cut the price of Chinese
exports such as electronics and clothing suggests that UK inflation
could remain subdued for longer.
The UK’s banks, which have consistently been criticised since the 2008
global financial crisis for reigning in their lending to businesses –
particularly small to medium enterprises (SMEs) – finally appear
willing to loosen the restrictions. According to EY Item Club data,
bank lending to corporates in the first half of 2015 totalled £103.4
billion, against £88.6 billion in H1 of 2014 and the first increase
since the pre-crisis era but still well short of that high.
Offsetting this, the UK’s prolonged low interest rate has encouraged
corporates and their treasury departments to explore a range of
alternative funding methods, such as corporate bonds. Bank of America
(BoA) analysts recently issued a bullish commentary on the attractions
of sterling-denominated corporate bonds and the attractive returns for
Other options include the nascent, yet fast-growing
peer-to-peer (P2P) lending sector and the earnings credit rate (ECR)
scheme which, coupled with cash pooling, offers a way for companies to
make their excess cash holdings pay and caps their bank fees.
Lastly, it should be noted that all projections for the UK economy
will require sharp and hasty revision if the forthcoming promised
referendum sees the British electorate vote for a withdrawal from the
EU – aka a ‘Brexit’.
Although many regard this as an unlikely outcome,
the government has yet to demonstrate keen enthusiasm for continuing
EU membership and uncertainty over the outcome has dampened business