Research Dept. News
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Monthly Report, num 351 - November 2011
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European union - United Kingdom
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The United Kingdom injects steroids into the economy
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Economic activity in the United Kingdom has been slowing up since the start of the year and leading indicators point to this trend continuing in the coming quarters. Of note among the demand indicators is the lethargy in retail sales, whose August figure indicates year-on-year growth of 0.1%. There are two reasons for consumer caution. Firstly, the unemployment rate has risen to 5% of the labour force, half a percentage point higher than the level at the beginning of the year. Secondly, the average income of British households, excluding wage bonuses, have grown at an average rate of 1.7% year-on-year for the last two years, while inflation has been 3.7% on average during the same period. In other words, the real disposable income of households is tending to deteriorate.
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For this reason, the central bank is increasing its programme to purchase financial assets.
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This effect has become even greater over the last few months; specifically, inflation reached 5.2% year-on-year in September, although it's true that we are very close to the highest levels it will reach this year. The main reason for this increase in September is the inertia in passing on higher oil prices to electricity and gas bills paid by consumers. However, this effect will gradually reduce over the coming months, together with the progressive disappearance of other factors that have also pushed up inflation, such as the hike in value added tax and in other duties and taxes. Moreover, activity remaining weak will also help to contain inflationary pressures.
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From the perspective of supply, companies have to face weak demand and tougher credit terms. Official statistics show how, since the start of this year, the outstanding balance of loans granted to non-financial firms in the United Kingdom has fallen by 3.2 billion pounds sterling. This represents a 3.3% reduction of credit year-on-year. For this reason, the Finance Minister of the United Kingdom, George Osborne, has announced a new plan for granting lines of credit to firms. The details of the plan will be published in November, although the following elements are already known: firstly, it will consist of buying bonds issued by large firms to reduce their financing costs. In a subsequent phase, the Treasury will encourage the granting of bank loans to SMEs by promising to purchase these securitized loans.
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In terms of economic policy, the Treasury has a good ally as the central bank has not been left behind and, for its part, the Monetary Policy Committee of the Bank of England decided unanimously among its nine members to increase the asset purchase programme by 75 billion pounds sterling. This reinforcement of non-standard monetary policy aims to acquire public debt. The Bank of England justified its decision by stressing the risk of the economic slowdown becoming worse. And the elements it mentions are: the lower disposable income of households, the weakness in world growth and fiscal consolidation. Factors that are undoubtedly reflected by economic indicators and which must be tackled by the important measures announced.
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