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DATE PUBLISHED: MARCH 2010
Economic growth slowed during 2004 and 2005, with GDP increasing by 1.9% in the latter year. In 2006, GDP growth accelerated, rising by 2.7%, while in 2007 GDP increased by a stronger 3.1%. In 2008, the UK economy grew by a moderate 0.7% overall, with the economy falling into a recession during the second half of the year. The UK economy remained in recession during much of 2009, with latest Government figures indicating a record 4.8% decline in GDP over the year. However, in the last quarter of 2009, the UK economy moved out of the recession, with GDP increasing by 0.3%. The economy had previously contracted for six consecutive quarters.
Total production output increased by 0.4% in the final quarter of 2009, compared with a fall of 1% in the previous quarter. Manufacturing output, which excludes energy production, rose by 0.2% in January 2010 compared with the same month a year ago. Output of the service sector fell by 1.4% in December 2009 compared with December 2008.
In the Government’s Pre-Budget report, published in December 2009, the Chancellor projects GDP to return to growth in 2010, at plus 1.25%. This is forecast to be followed by annual growth of 3.5% in 2011 and 2012.
Forecasts for GDP by independent analysts average around 1.1%, lower than the government forecast of 1.25%. There have been notable upward revisions for the 2010 forecasts by independent analysts during the second half of 2009, due to the tentative signs of a slow improvement in economic conditions.
Borrowing plans were further revised in the 2009 Budget, with the government increasing planned public sector net borrowing levels. Key measures on borrowing and spending announced in the 2009 Budget and subsequently the 2009 Pre-Budget Report include:
▸ Government borrowing reaching a record level of £95 billion in 2008/09, up from £78 million predicted in the 2008 Pre-Budget Report. In 2009/10, borrowing was planned to increase by a substantial 52% to £175 million, before being reduced in the subsequent years. However, in the 2009 Pre-Budget Report public borrowing predictions for 2009/10 were further revised upwards to £178 billion. According to Government plans, public sector net borrowing will be reduced from a projected £176 billion in 2010/11 to £96 billion in 2013/14.
▸ In the 2009 Budget it was announced that the Government will bring forward £3 billion capital spending from 2010/11. The money is to be used to increase motorway capacity, improve and build new social housing, renew schools and invest in energy measures. According to the 2009 Pre-Budget Report, net investment increased to £45.3 billion in 2008/09, up from £37.7 billion previously predicted in the April 2009 Budget. In 2009/10, net investment is predicted to rise to £49.5 billion. This is forecast to be followed by reduced investment levels in the following four years, with net investment falling to a projected £22 billion in 2013/14.
With a growing UK trade deficit and record levels of household debt, economic growth has been sustained by public and consumer spending during the last decade. However, public spending had come under tighter control since the March 2004 budget, with the Chancellor previously announcing plans that by 2011/12 the Government would be running a surplus of £13 billion per year. However, with the current economic downturn and Government plans to significantly increase public borrowing, the budget deficit is rising sharply. Indeed, according to the 2009 Pre-Budget Report, the current budget deficit reached 3.5% of GDP in 2008/09. The Government expects this to rise to 9.1% in 2009/10 and to 9.3% in 2010/11, prior to being reduced in the following four years. By 2014/15, the current budget deficit is anticipated to be reduced to 3.2% of GDP.
Latest figures reveal that the current surplus reached £1.2 billion in January 2010, compared with a surplus of £10.2 billion in January 2009. More generally, the public sector recorded deficits between 1991/92 and 1997/98 before moving into surplus in 1998/99. Deficits have been recorded since 2002/03.
In light of the recent marked rise in public debt, it is clear that major public spending cuts will have to be introduced in the coming years, regardless of which party will be in power following this year’s general election. However the Conservatives and the Labour party have adopted differing views on the timing of future cuts. The Conservatives take the stance that quick action will have to be taken to stem government deficit, whereas Labour take the view that spending cuts will be only introduced once the recession is over, and would only introduce major spending cuts post 2010/11. The Liberal Democrats have also announced that they would not back early spending cuts.
The employment rate for people of working age was 72.4% for the three months ending December 2009, down 0.1% from the previous quarter. The employment rate remains one of the lowest since February 1997. The number of people in employment was 28.91 million in the three months ending October 2009. The number of people in employment fell by 12 000 over the quarter.
The unemployment rate in the quarter to December 2009 was 7.8%, unchanged over the quarter. The number of unemployed people declined by 3000 over the quarter to reach 2.46 million.
INFLATION
The CPI measures inflation each month in the European Monetary areas as a whole and individually measures and compares each Member State, enabling reliable comparisons of inflation rates across EU member states. In terms of commodity coverage, CPI excludes a number of items that are included in the RPIX such as council tax, mortgage interest payments, house depreciation, buildings insurance, estate agents and conveyancing fees. The CPI covers all private households, whereas the RPIX excludes the top 4% by income and pensioner households who derive at least three quarters of their income from state benefits. The CPI also includes the residents of institutional households such as student hostels and foreign visitors to the UK which will therefore incorporate university accommodation fees, foreign students university tuition fees, unit trust and stockbrokers fees.
Latest data for January 2010 indicates that annual inflation was 3.5%, up from 2.9% in the previous month. Inflation is now at its highest rate since November 2008. The monthly rise is also the second largest ever increase in the annual rate between two months, largely reflecting the increase in the VAT rate in January. A large upward pressure also came from transport, partly reflecting higher fuel prices compared with a year ago. The Bank of England had warned inflation could rise to 3.5% this year but predicts it will fall back below the 2% target later in 2010. This is because the economy remains relatively weak as it continues to recover from the recession that ended in the last quarter of 2009
RPI inflation, which includes mortgage interest payments, was 3.7% in January 2010, up from 2.4% in the previous month. The main factors affecting the CPI also impacted the RPI. Furthermore a large upward contribution came from housing, where mortgage interest payments rose compared with the previous year. RPIX, which excludes mortgage interest payments was 4.6% in January 2010, up from 3.8% in the previous month.
As an internationally comparable measure of inflation, the CPI shows that the UK inflation rate in December 2009, at 2.9%, was above the provisional figure for the European Union as a whole of 1.4%.
INTERST RATES
The Bank of England is solely charged with meeting Government determined inflation levels, and interest rates are primarily reviewed to accommodate inflation targets.
The latest interest rate cut by the Bank of England took the base rate to 0.5% in March 2009, representing a new all-time low. The rate cut in March reflects an attempt to boost the shrinking economy and encourage bank lending, which so far has not increased despite significant cuts in the base rate in recent months. In an attempt to boost bank lending, the Bank of England has also introduced quantitative easing, a process of increasing the amount of money in circulation. The bank will initially add £75 billion and use it to buy government bonds and corporate debt over the next three months to boost the flow of money in the economy. The bank has also been given permission by Alistair Darling to spend a total of £150 billion on asset purchases. The idea is that if the amount of money in the system is boosted, commercial banks will find it easier to lend. The Governor of the Bank of England believes that this policy would “eventually work”.
The rate cut in March 2009, followed five rate cuts since October 2008, reducing the base rate significantly from 5%. The previous rate cuts were also aimed at steadying the faltering economy and improving the tight credit supply.
Prior to the rate cuts in 2008, in the period between August 2006 and July 2007, interest rates were increased five times from a level of 4.75% to 5.75%, in an attempt to control inflation. In the 12 months up to August 2006 interest rates were held at 4.5%, while in the 12 months to August 2005, interest rates were held at 4.75%.
In the Eurozone, the Europan Central Bank has cut its base rate six times since October 2008, with the latest cut in April 2009 taking the base rate to a historic low of 1%. Prior to that, the bank increased the base rate to 4.25% in July 2008, the highest level since it started setting Euro rates in January 1999.
HOUSE PRICES
The Halifax, Britain’s largest mortgage lender, suggests that house prices fell by 1.5% in February 2010, with average prices standing at £166 857. This is the first decline in prices since June 2009. Nonetheless, on an annual basis, prices in February 2010 were still 4.5% higher compared with a year ago, representing the largest increase in the annual rate of change since January 2008. Furthermore, average house prices in February 2010 were 8% above the low reached in April 2009. The decline in house prices in February 2010 is due to a number of factors. These include the increase in the number of properties for sale, the bad weather in the first two months of 2010, together with the return of the lowest stamp duty threshold. of £125 000. Prior to that, significant cuts in interest rates have improved mortgage affordability have supported housing demand during the second half of 2009. Looking ahead, the Halifax expects house prices to remain flat during 2010, with the prospects depending on how the economy evolves and the supply of properties for sale.
According to the Nationwide House Price Survey, prices declined by 1% in February 2010. The Nationwide also believes that the adverse weather conditions and the end of the stamp duty holiday are the main factors behind the monthly decline in house prices. In the three-month period to February 2010, prices increased by 1.6%, indicating a slightly more moderate development than seen in previous three month periods. On an annual basis, prices increased by 9.2% in February compared with a more moderate increase of 8.6% in January. The Nationwide does not expect significant house price movements in either direction during 2010.
Latest data published by the DCLG also points towards a moderate improvement in the housing market. According to the DCLG’s latest publication, the mix-adjusted average house price in the UK in January 2010 stood at £207 159, up by 6.2% compared with January 2009. UK house prices rose by 4.8% in the quarter ending January 2010, which compares with a more moderate rise of 2.3% for the quarter ending October 2009.
Data from the Bank of England shows that growth in the stock of mortgage lending to individuals slowed sharply during financial crisis, and in the early part of 2009 reached its lowest annual rate since the Bank started the series in 1988. However, recent data from the Bank of England suggests an upward trend in mortgage approvals for house purchases during the latter part of 2009, with the number of loans approved reaching 59 307 in November. However, the number of loans approved fell by 2% in December 2009 and by a stronger 18% in January 2010, taking the number to 48 198. Nonetheless this is still above the 33 000 loans approved at the beginning of 2009.
Figures from the Council of Mortgage Lenders show that the number of first-time buyers taking out mortgages reached a peak of 401 000 in 2006, but fell in the following two years, as banks tightened their lending criteria. The downward trend was reversed in 2009, when the number of loans approved to first-time buyers rose by 2% to 198 000, but remaining significantly below the peak recorded in 2006. Latest data shows that first time buyer mortgages totalled 32 000 in January 2010, down by a significant 49% compared with December 2009. This is largely a reflection of the end of the stamp duty holiday, which meant that many buyers rushed through their purchase to complete in December. However the number of loans approved in January 2010 was 38% above the number approved in January 2009. |
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