(All figures quoted are latest available as of April 2014)
One of the major reasons as to why recoveries from economic downturns tend to be slow is that something of a vicious circle takes hold. Faced with a continual diet of grim economic news, the public rein in their spending when consumer spending is crucial to kick-starting the recovery. The so-called ‘feel good factor’ is vitally important.
But after a long period in the doldrums, it seems like the UK economy is finally showing definite signs of improvement.
One of the main surveys of public confidence in the UK economy is the TNS Public Opinion Monitor. The latest survey, published in March 2014, shows that 32% of respondents expect the economy to improve over the next 12 months, while only 11% expect it to worsen.
The Office for National Statistics quarterly figures for Household Final Consumption Expenditure (total consumer spending) show spending of almost £270 billion in the final quarter of 2013, representing a 4.4% increase on the equivalent period in 2012.
Salaries have suffered during the difficult economic times with many employers feeling unable to afford wage rises and with rises for public sector workers capped at 1% by the Government. But recently, the rate of growth in wages finally rose above the rate of inflation, after a period where wages have fallen in real terms by 10% since 2008, according to Capital Economics. The rise in National Average Earnings (NAE) for the 12 months to February 2014 was 1.7%, while the Consumer Prices Index (CPI) – the official measure of the UK’s inflation rate – was 1.6%. CPI had been as high as 2.9% as recently as June 2013, and in March 2013, the gap between the two figures was huge, when CPI stood at 2.8% and the NAE index rose by just 0.6%. CPI had been at 5.2% as recently as 2012.
The fall in inflation was largely attributed to less significant rises in prices of petrol, clothing and footwear in recent months. And after several years of soaring energy bills, Scottish and Southern Energy became the first major supplier to announce a price freeze, announcing in March 2014 that prices would not rise until 2016.
The cost of living has become a major political issue. In his response to the March 2013 Budget speech, Leader of the Opposition Ed Miliband MP responded to the apparentlypositive economic news revealed in the speech by saying: “the Chancellor painted a picture of the country today that millions of people simply will not recognise,” suggesting that many Britons were not experiencing the effects of a recovery.
Politicians and the media attach great importance to the quarterly and annual figures on Gross Domestic Product (GDP) published by the Office for National Statistics. When economic commentators say that the economy grew by a certain percentage, what they actually mean is that GDP rose by that amount over the period. Investopedia defines GDP as “The monetary value of all the finished goods and services produced within a country’s borders in a specific time period.”
The GDP figures are considered vitally important as indicators of the nation’s economic health, even though estimates of this figure are often revised at a later date. A recession is defined as two successive quarters where GDP falls, and in April 2012 it was announced that the UK had suffered a ‘double-dip’ recession after the first estimates of economic growth for the first quarter of 2012 showed a fall of 0.2%, after a drop of 0.3% in the final quarter of 2011. The UK had already experienced four successive quarters of negative growth from the second quarter of 2008 to the first quarter of 2009.
Yet as late as June 2013, the double-dip recession was revealed as false, when the figure for the first quarter of 2012 was altered to zero. Based on the updated figures, the only period in which the UK economy entered recession in recent years was for five quarters between the second quarter of 2008 and the second quarter of 2009. The worst period for economic performance was the first three months of 2009, when growth fell by as much as 2.5%.
The latest quarterly figure available, for the first quarter of 2014, shows estimated growth of 0.8%, representing the fifth successive quarter of growth. Chancellor George Osborne MP hailed the figures by saying: “the foundations for a broad based recovery are now in place.” However, the size of the economy is still 0.6% lower than its peak in 2008.
Latest predictions for future growth of the UK economy from the Office for Budget Responsibility predict a 2.7% annual increase in 2014, followed by a 2.3% rise in 2015 and a 2.6% rise in 2016.
If economic times are good, people should feel able to put more money aside in savings. The more living standards are squeezed, the less surplus income people have after paying their essential bills. But the latest Saving vs. Raiding Review published by Halifax Bank reveals a mixed picture in this area. The review focuses on the period November 2013 to January 2014, as consumer finances are usually stretched to the greatest extent over the Christmas period. The review says that each person saved an average of £770 over this period, a rise of 13% on the equivalent figure for November 2012 to January 2013. However, the proportion of people saving nothing at all in this three month period rose to 33%, compared to 23% the year before. And the ‘raiding’ element of the review revealed that an average of £1539 was withdrawn from savings pots in the period November 2013 to January 2014, a rise of 34% in 12 months.
Incentives to save remain limited as one of the Bank of England’s methods of handling the economic downturn has been to freeze base interest rates at 0.5% since 2009.
Demand for homes in the UK remains significant and the Government is under pressure to balance the demand for more homes to be built with the environmental and social impacts of doing so. The current situation has led to significant growth in house prices in many areas, and the Halifax House Price Index shows an 8.7% increase in the average price of a home in the 12 months to March 2014.
However, prices fell sharply during the downturn, and average prices remain 10% below their peak level of 2007.
Rapidly rising prices are bad news for those seeking to get on the housing ladder, but a healthy housing market is regarded as crucial to maintaining the feel good factor, in that people feel prosperous if the value of their biggest asset rises.
About the Author
John Baird has been involved in personal insolvency and finance since the turn of the century and specialises in advising Scots in financial distress. He offers this support though the website Scotland Debt Solutions.