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News Analysis: Strong UK unemployment figures, higher inflation may not herald early Bank Rate rise

English.news.cn   2014-07-18 09:23:43

LONDON, July 17 (Xinhua) -- The strength of the recovery in the British economy was further demonstrated this week with a fall in the headline unemployment rate from 6.6 percent to 6.5 percent, but this may not necessarily herald an early rise in the Bank Rate.

Also this week, consumer price inflation (CPI) took an unexpected jump from 1.5 percent in May to 1.9 percent in June, close to the Bank of England (BOE) target, and both these sets of figures indicate a strong and stable economic recovery, with GDP growth this year slated to be about 3.1 percent by the BOE, against an historical average of about 2.5 percent.

The date for a rate rise is clearly getting closer, as the economy is proving itself more robust, but the danger remains that an economy which has had an historical low Bank Rate of 0.5 percent for more than five years may not react favorably when rates begin to rise.

There is a possibility that one of the principal drivers of growth -- consumption -- may not be maintained if the Bank Rate begins to rise.

Households have been dipping into their savings to fuel a consumption-led recovery, with the household savings rates falling from 6.9 percent in Q2 2013 to 4.9 percent in Q1 this year.

This is not sustainable in the long term, and there are medium term dangers too, centered on the ability of wage earners to continue spending even as their wages fall in real terms.

Regular earnings growth in the three months to May fell to just 0.7 percent year on year, the weakest rate since the series began in 2001.

Set against CPI climbing to 1.9 percent, it is clear that British wages are continuing the trend seen since the financial crisis of falling in real terms.

Under those conditions, the strength of the continuation of a consumption-led recovery could be muted.

If BOE governor Mark Carney throws into that mix even a 0.25 percent rate rise at the end of this year, as many forecasters are now predicting, there is every chance that households close their wallets, thus hitting the high street.

It's certainly a possibility and one that the BOE Monetary Policy Committee (MPC), which sets rates, will be considering.

The members of the committee will also be looking at increased productivity, and the types of jobs that are being created, and here the evidence points more clearly to a stronger, more rooted recovery.

Many of the jobs created over the past three months have been full-time, and there are also fewer part-time jobs being created and fewer workers moving into self-employment.

Also, last week's Recruitment and Employment Confederation/KPMG June jobs survey recorded the fastest rise in starting salaries since the late 1990s, as well as an increased demand for permanent workers, and a sharp decline in the number of workers available for these posts.

This points to the slack in the economy being taken up, and to the MPC taking the prompt and acting on it.

Business and industry are aware of the recovery, but caution against an early rate rise, for fear that it may mute recovery.

David Kern, chief economist at the industry-representative British Chambers of Commerce (BCC), said in a statement that the record employment figures, and the continued fall in joblessness showed that "the recovery really is gaining momentum".

But Kern cautioned, "The case for not raising interest rates prematurely is strengthened further by weakening wage growth, and despite the increase in inflation, it still remains below the BOE's 2 percent target."

Kern said, "The MPC must boost business confidence by explaining that higher rates will only be considered when economic circumstances justify such a move."

Editor: An
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