Consumer confidence in the UK is expected to slow even further on the back of higher national insura...
Consumer confidence in the UK is expected to slow even further on the back of higher national insurance contributions as well as the bout of hot weather in the country.
But it is not a completely gloomy story - economists are not predicting a deflationary situation in the UK and a recovery is expected in the second half of the year.
Errol Francis, UK equity fund manager at Barings, says: "We would probably expect UK consumer confidence not to grow as much as the last few years. Consumers already have a high level of debt, but both interest rates and unemployment are at low levels."
Francis warns the one negative factor has been the tax hikes by the UK government. The increase in national insurance contributions and rising taxes have given people less spending power. In addition, people staying indoors as a result of the hot weather has seen a slowdown in sales. The hot weather has especially led to a decline in clothing and footwear retailers. Sales fell 0.1% at food stores and 0.5% in other shops. Sales in goods such as electrical fans and wading pools increased.
But not all managers have the same view. Isis has changed its strategy from underweight in the food sector to neutral. Mike Felton, manager of the Isis UK Prime Fund, thinks the hot weather will bring an increase in the demand for barbecue food and ice creams.
Nevertheless, consumer spending is expected to slow. There has been a drop in average earnings to 3.1% year on year from 3.5% year on year the previous month.
Consumers cannot continue to keep borrowing as they have previously to keep spending. Consumer spending is not going to be as robust as it has been over the past few years, but Francis does not anticipate any massive slowdown.
Francis warns he is not expecting much in the way of a recovery. There are still some tax issues over what happens next year - whether or not the government will raise taxes to meet the budget deficit.
He does not predict a deflationary situation for the UK even though prices have been falling. The government policy response will stop this. The Bank of England has been cutting rates and if it has a choice between deflation or inflation, it would choose inflation. Deflation is very hard to turn around and the government will stop at nothing to prevent it. Francis thinks the recent fears of inflation were down to a lot of temporary factors and so does not expect a rate increase from the Bank until there is evidence of a sustainable recovery. And there is no conclusive evidence of a sustainable level of recovery.
The UK even lowered its main lending rate in July to 3.5% to spur growth.
Simon Rubinsohn, chief economist at Gerrard, says: "Inflation in July came in well ahead of market expectations with the key RPIX measure rising from 2.8% to 2.9%. The main source of upward pressure on inflation was from clothing and footwear. Last year, there was much heavier discounting of these items in the summer sales with prices falling by more than five per cent. This summer retailers limited price cuts to just three and a half per cent.
"The impact of the more modest scale of discounting was to add almost one per cent to the inflation rate in July. A second factor pushing inflation higher was travel costs that reflected a seasonal increase in airfares. This is the first year that this particular series has been included. Meanwhile, the principal downward impact on inflation came from alcoholic drink where prices fell this July in contrast to the increase a year ago."
Rubinsohn also thinks inflation is still likely to fall back towards the 2.5% target over the balance of the year. The main reason for this is likely to be a continuation of the helpful base effects emanating from a moderation in the rate of house price inflation. Lower mobile phone charges resulting from the competition enquiry will also be helpful. On the other hand, there is evidence that the current heat wave is having an impact on wheat prices with the cost of bread likely to rise over the coming months. The drought in Europe could also push up the prices of some fruit and vegetables. This will make progress slower than he previously had envisaged.
First mentioned in Cridland Report
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