UK economy stable despite political turmoil, data show

Jumps in gas and electricity prices propelled price inflation above the Bank of England’s 2 per cent target in April, but few economists think this will trouble the central bank sufficiently to cause it to raise interest rates. Prices rose at an annual rate of 2.1 per cent in April, marginally below the 2.2 per cent forecast by Reuters’ poll of economists, but up from 1.9 per cent in March, according to the Office for National Statistics. Public borrowing in the same month was £5.8bn, almost exactly the same as a year earlier, indicating that improvementsin the deficit have come to an end but that borrowing is now at a low level. House prices rose 1.4 per cent in March compared with the same month a year ago, up from 1 per cent in February, according to the ONS. This was one of the first increases after almost three years of decline in house price inflation in the wake of the June 2016 Brexit referendum — although house price inflation remains well below the rate of earnings growth. The ONS data paint the picture of a stable UK economy. Growth is modest, with inflation under control, while at the same time unemployment is at multi-decade lows and the employment rate is at a record level. Thomas Pugh, UK economist at Capital Economics, said: “While we suspect that inflation is likely to remain above the 2 per cent [target] for the rest of the year, we don’t think that it will force the Bank of England into action anytime soon.” Both consumer electricity and gas prices increased between March and April 2019, as energy providers responded to a near 10 per cent increase in Ofgem’s energy price cap. Inflation, measured by the important Retail Price Index — which is linked to rail fares, student loans and index-linked government bonds — jumped from 2.4 per cent in March to 3 per cent in April. The statistical authorities and the Treasury have delayed responding to a House of Lords report, which criticised their failure to reform the index. Core inflation — which excludes energy, food and alcohol — declined slightly to 1.8 per cent from an upwardly revised 1.9 per cent in March. The figures show the strong labour market is so far having little effect on underlying price pressures. UK unemployment dropped to its lowest rate since 1974, with earnings growth rising faster than inflation and weak productivity growth leaving companies so far accepting squeezed margins rather than raising prices. Unlike for most of 2017 and 2018, the rise in inflation over 2 per cent is not related to the depreciation of sterling, which raised import prices in the wake of the Brexit vote. That effect has now ended and inflation was driven by higher energy prices, which reflected increases in the wholesale price of electricity and gas that have been passed on to households. But some economists fear that rising political tensions and the fragility of Theresa May’s government might soon lead to a further large drop in sterling, which could again hit consumers in the pocket. The pound has been falling against the dollar in recent days, hitting the lowest value of the year so far on Wednesday of $1.2665. Samuel Tombs, economist at Pantheon Macroeconomics, said that with Brexit related uncertainties intensifying “it is easy to envisage circumstances in which it would fall significantly further”. Although the Monetary Policy Committee of the Bank of England has indicated it will be less tolerant of a depreciation of sterling than in 2016-17, people trading in the market participantsare convinced the BoE will not raise rates this year, and say there is only a 10 per cent probability of a rate rise before December. As price inflation rose, the UK government borrowed £5.8bn in April, kicking off the 2019-20 financial year in line with expectations.

Although the long run of sharp decreases in monthly borrowing has come to a halt, there is no sign yet that Philip Hammond, the chancellor, is on course to miss his public finance targets for this year. The Office for Budget Responsibility, the fiscal watchdog, expects borrowing to only marginally increase over the year as a whole. The latest official figures show that borrowing in the full 2018-19 financial year was £23.5bn, compared with a forecast of £22.8bn — a little worse than the £22.8bn predicted by the OBR in the March Spring Statement. Tax receipts in April were 2.4 per cent higher than a year earlier, below the OBR’s full-year forecast of 2.8 per cent, but little can be deduced from the figures at this early stage in the financial year. John Hawksworth, chief economist at PwC, the accountants, said: “Today’s data confirm that the public finances are back in decent shape after nine years of austerity.”