Former US president Bill Clinton famously said, “it’s the economy, stupid”. He was right. The key thing to people’s sense of confidence and well-being is the state of the economy around them.
Last week, we had a couple of economic announcements that are important.
The first, inflation, had prices rising steadily at 4% - no change on the previous month. The Bank of England is charged with holding inflation at a steady 2% and it does this through tightening or loosening money supply, through the control of interest rates and temporary releases of extra cash known as quantitative easing (QE). Because of the financial crisis back in 2008, we have been in a very peculiar economic period with interest rates at super low levels, and a lot of money (over £900 billion) injected into the economy through QE. Because of the Ukraine war and the disruption of supply chains, plus (and I must be honest here) Liz Truss’s disastrous micro-administration, inflation has run high and so interest rates have returned to a level not seen for nearly a couple of decades.
The good news is that now inflation is getting under control, money markets expect the Bank of England to start cutting interest rates from around June, with inflation back at the target rate of 2%.
Meanwhile, figures for the fourth quarter of last year showed a small (0.3%) drop in economic output, confirming a recession (2 consecutive quarters of decline). Most commentators accept that this is small, in line with what is going on globally (bar one or two exceptions), and that the 1st quarter of this year will confirm that we have come out of the minor recession (when published in April).
But what is important is what these figures mean to households. Divide the economy by the number of people living here – GDP per capita – and the figures look worse. We have seen 7 quarters of decline per capita and that is a big deal. It partly comes back to a long-standing problem in the UK of productivity – the economic output of workers’ hourly production. We have long lagged with regard growth and there can be many reasons. The high level of investment into non-productive assets such as buy to let properties is one such reason, amongst many others.
The budget is on the 6th March. The chancellor will have a lot of ideas, but I shall be looking carefully to see what he plans to boost household wealth. I remain optimistic.