Bill Jamieson: Chancellor relies on Bank’s tender mercies

Consumer confidence could be stalled by a rise in interest rates. Picture: Getty
Consumer confidence could be stalled by a rise in interest rates. Picture: Getty
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Seldom has a UK chancellor been in greater need of an economic uplift. Retail spending growth is slowing. The service sector is losing momentum. Business investment has been hit by deepening concern over a Brexit “cliff edge”.

And Theresa May’s premiership continues to lose ground to the populism of far left Labour leader Jeremy Corbyn.

But is it really so bleak? We are still enjoying a boom in employment. Across the UK, numbers in work rose by 94,000 in the three months to August to stand at 32.1 million, while unemployment fell by 52,000 to 1.4 million. And while Scotland saw a small rise in numbers out of work, our unemployment rate of 4.1 per cent is still lower than the equivalent UK rate of 4.3 per cent.

Retail sales are still growing – albeit at a modest rate, helped by the continuing surge in online shopping. Online sales values are up 14 per cent year on year and now account for some 17 per cent of all retail spending.

And particularly encouraging were figures out last Friday showing markedly better than expected figures on the public finances. They suggest that Chancellor Philip Hammond may have the wherewithal to cut taxes and/or boost spending when he presents his Autumn Statement on 22 November. And we are certainly in need of tax reduction to boost business growth and enterprise.

The public finances saw the lowest September shortfall since 2007 – at £5.9 billion, down almost 11 per cent compared with the same month last year. In addition, the deficit for August was revised down by some £1bn to £4.7bn.

This takes the deficit to £32.5bn over the first six months of the 2017-18 fiscal year – down 7.2 per cent on the £35bn shortfall for the previous corresponding period.

If the improvement is sustained over the full fiscal year, public borrowing in 2017-18 would come in at £42.4bn – well below the shortfall of £58.3bn forecast by the Office for Budget Responsibility (OBR) in the March budget. This suggests the Chancellor would have almost £16bn by way of “wriggle room” for his budget next spring. By that time we will all be craving a wriggle out of the Brexit impasse.

But the falling budget deficit is good news only up to a point. The final undershoot may be limited over the coming months by a still subdued economy limiting tax receipts and by higher debt interest payments.

Additionally, the OBR is set to downgrade its assumptions for UK productivity growth over the next five years which would weigh down on forecasts for UK GDP growth and projections of further budget deficit reductions.

And the cumulative total of public sector net debt, excluding state-owned banks, continues to rise. It has climbed a further £145.2bn since September last year to £1,785bn, equivalent to 87.2 per cent of gross domestic product.

So while there has been progress in getting the deficit down by over two-thirds, government borrowing is still running at more than £150 million a day – hardly a figure we’re ever likely to see emblazoned on the side of a campaign bus.

The still growing public debt, and uncertain measurements of the Chancellor’s “wriggle room”, are not the only challenges ahead. The economy is growing at a very slow pace, and well below its long-term trend. So how do we lift ourselves out of this rut?

The latest labour market figures show the ongoing squeeze on household incomes as a result of rising inflation – now running at an annual rate of three per cent. With some sectors reporting pay growth below two per cent, and average “real” wages after inflation shrinking, the effects on consumer confidence and retail spending are all too predictable.

The latest figures show retail sales suffered an unexpectedly sharp fall of 0.8 per cent last month, taking year-on-year growth over the third quarter down to 1.5 per cent, its lowest since the second quarter of 2013.

It is against this background that the Bank of England has signalled that it is poised to raise interest rates, from 0.25 per cent to 0.5 per cent. Thus, on 2 November, less than three weeks before Hammond presents his Autumn Statement in the Commons, the Bank’s Monetary Policy Committee may deliver the first rise in rates since the summer of 2007.

Why? “We are talking about just easing a bit off the accelerator to keep with the speed limit of the economy,” explained Bank Governor Mark Carney. But where are the signs of economic acceleration? And in what way can consumer demand, and behind that, wage growth, be said to adding to inflation pressures?

Figures due this week are likely to show that UK GDP growth saw no meaningful pick-up in pace in the third quarter, with 0.3 per cent the widespread prediction. Growth in the services sector appears to have been relatively weak while the construction output high is expected to have contracted.

“The fourth quarter of 2017 and early months of 2018 look likely to remain very hard work for the UK economy,” said Howard Archer of accountancy giant EY. “Consumer purchasing power is still being squeezed appreciably while ongoing business concerns and uncertainties over Brexit are likely to limit investment. Hopefully, net trade can help growth as exports benefit from healthy global activity and a very competitive pound.”

He forecast growth of 1.5 per cent overall this year, and just 1.4 per cent in 2018.

Little wonder that the prospect of a rate rise at this time is adding to the widespread mood of caution across businesses large and small.

Said Liz Cameron, chief executive of the Scottish Chambers of Commerce, “The Bank of England must hold their nerve on interest rates. An increase at this point would damage consumer confidence and spending at a critical period for the retail sector.

“It is essential that the Chancellor recognises these conditions in the upcoming budget. The budget must seek to increase business investment in skills and tackle our productivity gap with a range of measures, ensuring that wages increase and that consumer spending continues to act as one of the UK economy’s key drivers.”

It would be a small mercy – and well short of the galvanising, pro-enterprise budget required. But it is on small mercies we are now dependent.