Fragile state of UK economy scrutinised as nation mourns

GDP, inflation and retail sales figures due to be released over next few days

The fragile state of Britain’s economy will be underlined this week by official figures showing a renewed slump in consumer spending amid soaring living costs, before a possible slowdown in activity during the national period of mourning after the death of Queen Elizabeth II.

City economists are forecasting a further rise in inflation to 10.2% in August when official figures are published on Wednesday, as the rising price of a weekly shop and sky-high energy bills add to the financial pressure on struggling households. This would mark a modest uptick from the July reading of 10.1%, which was the first time the consumer prices index had risen above 10% since the early 1980s.

The figures come after the Bank of England delayed a decision over a further rise in interest rates from the current level of 1.75% this week, in a mark of respect for the Queen. With businesses, financial institutions and unions cancelling or pushing back major events amid the national period of mourning, the central bank’s rate-setting monetary policy committee will wait until 22 September to act.

Over the weekend it was confirmed that the Queen’s funeral on Monday 19 September will be a bank holiday. While providing an opportunity for the public to pay their respects, the event could bring mixed blessings for businesses.

Rail industry leaders said travel to and from London would be “extremely busy”, urging mourners going to the capital to plan their journeys in advance.

Extra bank holidays can provide a boost to retail sales and hospitality spending. However, additional bank holidays have also led to a fall in monthly output for the economy as a whole, with businesses and factories closing their doors early. Official figures have shown a drop in monthly gross domestic product (GDP) for previous one-off bank holidays, including the Queen’s golden and diamond jubilees in 2002 and 2012 respectively.

Simon French, chief economist at the City broker Panmure Gordon, said one-off bank holidays in 2002, 2012 and earlier this year had lowered economic output by at least £2bn. “There are few parallels for this moment and that makes forecasting particularly difficult,” he told the Sunday Times. “We may not simply be talking about an extra bank holiday. There could be a prolonged period of national mourning.”

Government guidance published last week encourages companies to consider cancelling or postponing events during the period of mourning, especially on the day of the state funeral. However, there was no obligation to suspend business, with the decision at each firm’s discretion.

None the less, on Friday, some retailers temporarily shut their doors, and many events including conferences and sports fixtures due to be held this week have been postponed. Taken together, this suspension of normal business and cultural life could weigh on an already gloomy economic picture.

Households have begun reining in their spending in response to soaring prices for basic essentials, with the City braced for figures confirming a drop in August retail sales in Great Britain when the Office for National Statistics publishes its latest monthly data later this week. Economists polled by Reuters expect a fall of 0.4% on the month, reflecting the downturn in wider economic activity as Britain drifts towards a lengthy recession.

Last week the government set out plans to freeze energy bills at an average of £2,500 a year for two years, as part of a package of support for homes and businesses that marks one of the biggest government interventions since the financial crisis. In her first major act as prime minister, Liz Truss said its energy price guarantee would “give people certainty on energy bills, curb inflation and boost growth”.

Economists believe the measures could prevent inflation from rising much further than current levels while helping to lessen the impact of recession. However, the Bank is still expected to keep raising interest rates amid the risk of high inflation becoming entrenched, and as the pound comes under pressure on global financial markets on the back of speculation over the cost of Truss’s tax and spending plans.

Figures released on Monday are expected to show that economic activity recovered in July after June’s fall, when the platinum jubilee long holiday weekend weighed on growth. After June’s 0.1% drop in UK GDP, City economists predict a monthly rise of 0.4% in July, while warning that this will represent a temporary respite amid wider pressure on businesses and households.

“July GDP should be disappointing,” said Klaus Baader, an economist at the French bank Société Générale. “Retail sales are likely to show renewed weakness. Inflation probably only edged up in August, but recently all the surprises have been to the upside, so we should be prepared for another.”
Tags: UK