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Bank of England Inflation Briefing

Budgets, Businesses, Growth l

bank_of_england_logo_8313As members of the Chamber of Commerce, we were delighted to have breakfast with the Yorkshire and Humberside Agents of the Bank of England. It was an interesting assessment of where our economy has been since 2007, where we are today, and what the future is expected to bring and the role the Bank of England can have in influencing this.

Where is the money?

As a country, the cost of borrowing for our government is reducing following a rise in the rates being charged a few years ago. In turn our banks are now able to access funds at lower rates than previous years.

However, while the cost to the end consumer of borrowing in general is lower, businesses in certain sectors and individuals with certain demographics remain being “hit” with higher rates for borrowing, and in certain cases are still priced out of the market, or not able to get offers for finance at all.

Overall, as an economy we have an increased level of access to funding than in previous years, but with some sectors of the economy having issues in accessing finance.

Where is the growth?

Our growth to date has come from 3 areas of the economy:

Consumer spending

Individuals are spending more both on necessary items to live, but also on discretionary purchases. The statistics show a growth in the level of household budgets which are available for discretionary spend. A concern is that a rise in interest rates (ie. Mortgage payments/rents) will reduce the level of discretionary spend in households.

Private sector housing

There has been an increase in the building of new private sector housing, and while the level is below the believed demand for housing, it remains as contributing towards overall growth in the economy.

It is also important to recognise the level of spending households are making on renovating and maintaining their homes. The investment in new kitchens, bathrooms and extensions to properties is aiding growth.

Business investment

Since 2011 there has been a growth in the infrastructure investment by businesses in both capital such as equipment and buildings, but also in their processes and people to improve efficiency and quality.

In the early part of the economy, the rate of saving increased as individuals started saving more than pre 2008, and borrowing less. The trend has now turned, and consumers are now using their savings. Some caution is needed as some savings are being used to meet general household expenses, and is therefore not sustainable, and will not be replaced.

The overall growth level for 2014 is expected to be 3.4%, reducing slightly in 2015 to 2.9% and then maintaining at between 2.5% and 3.0% in 2016 and beyond.

With inflation expected to be around 2.0% through to 2016, this would mean growth exceeding inflation for the next 3 years. Inflation is expected to be flat line, as the prices of 3 of the key components in our spending are predicted to stabilise:

Fuel

Gas

Electric

Petrol/diesel

Agriculture

Food & drink

None precious metals

Construction

Vehicles

Equipment

Building

Where are the jobs?

As a country, we do have a record number of people classed as “in work”. The recovery period has seen more people becoming self-employed and in part time employment, although there has been growth in full time employment too.

It is unclear how many people have entered self-employment and part time employment because of a lack of full time employment. There is some thought that a lack of confidence is seeing businesses prefer to engage with contractors rather than commit to taking on permanent employees, and part time employment can offer flexibility. This may suit some employees, but for others not offer stability of income which gives them the confidence to spend beyond necessity.

The conclusion of the presentation was:

–          There is growing confidence in the economy

–          Inflation is subdued

–          Monetary policy is supportive

–          The Bank of England does not have the tools to address the housing market.

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